Heavy oil could gain with Trump border tax
Viscous crude may be largely untouched
CALGARY • A Trump- inspired U. S. border tax on imported crude could actually work to the advantage of Canadian heavy oil producers, analysts said Thursday.
Analysts at National Bank said in a research note that because many U. S. refineries are calibrated to accept heavy oil, which is only produced in a few select regions, demand for Canada’s viscous oilsands crude is likely to be uninfluenced by a border tax.
“This dynamic could result in a pricing shift that may drive the relative Canadian l i ght/ heavy differential tighter than would be suggested today,” they wrote.
The analysts were careful to note that the so-called “Trump tax” on imported goods is difficult to quantify due to a lack of clarity around the policy.
Trump said during his presidential campaign that he would consider taxing imported goods as a way to encourage the domestic buying and selling of materials and labour.
As Trump prepares to take office Friday, Canada’s oil and gas sector is contemplating how such a tax would impact their operations. Many observers remain uncertain over which, if any, policies Trump will implement once he enters office.
The t ax, proposed by U. S. House of Representatives speaker Paul Ryan and others, would effectively raise the costs of imports by an estimated 25 per cent by removing an existing tax writeoff on imported products and materials.
The National Bank analysts said that because oil prices are ultimately set by refinery prices, and because those refineries would be hard- pressed to shift to lighter forms of crude, “we would expect the U. S. demand for heavy oil to remain intact.”
The main U. S. markets f or Canadian crude are within two regions known as PADD I and PADD II, which account for about 70 per cent of U. S. oil imports, the report said.
In October t hose t wo regions accepted 3.2 mill i on barrels per day of Canadian c r ude, which accounts for about 61 per cent of their total import capacity.
U. S. energy expert Philip Verleger, who has been studying the recommended U. S. tax code changes since last summer, has warned that exporters from Canada and Mexico could be hit hard by the tax.
“Bluntly speaking, f or oil the law’s passage is pure mercantilism.
“Exporters from Mexico, Canada, and the rest of the world could be shut out,” Verleger, principal of Colorado- based consultancy PK Verleger LLC, wrote this week in a report to clients.
“As Woody Allen would say, ‘ Sorry, suckers.’ ”
The tax could change oil flows between the two countries completely, Verleger said. U. S. producers would have the incentive to sell at home and no incentive to export.
The proposed changes and their impacts are just now beginning to dawn on the Canadian oil industry, he said in an interview this week.
“It’s blindsided everybody. Canadian producers should be worried.”
THIS DYNAMIC COULD RESULT IN A PRICING SHIFT.