Suggested ‘border adjustment’ tax is tossed to and fro in the US

AS WITH many industries now fretting over the uncertain future of US trade policy, the oil business is sizing-up the potential impact of the various protectionist measures being bandied about Washington – which have sent crude markets into a tizzy.

The trade proposal with the most momentum may be the controversial tax reform, pushed by Republicans in Congress, that could slap a tax of up to 20 percent on all imports, including crude oil.

That would spark a rise in fuel costs across the country that would hurt East and West Coast refiners more than those near the Gulf of Mexico.

It would also hit the pocketbooks of drivers and airline passengers, as refiners pass on the nearly $30 billion (R403bn) that the tax could cost them each year on crude imports.

“The consumer is really the one that suffers,” Cynthia Warner, executive vice-president for operations at refiner Tesoro Corporation, said earlier this month at a conference in Houston. Tesoro operates seven refineries: two in California, two in North Dakota and one each in Utah, Alaska and Washington.

The “border adjustment” tax could also redraw trade maps for global flows of crude and refined products. US crude producers would be the obvious beneficiaries as their overseas rivals bear heavy taxes on imports, which are used often by coastal refiners, especially those without direct access to US pipelines.

Higher prices for domestic crude would make pumping from more US fields economically viable – encouraging higher output from the shale patch and giving more momentum to a nascent recovery in the US shale industry after a brutal international price war.

While that likely would not put a big dent in the 7.9 million barrels a day that the US imports, Goldman Sachs estimates that US oil exploration and production firms would benefit to the tune of $20bn from higher domestic crude price and increased production.

Crude markets have been buffeted by the public backand-forth between President Donald Trump and the Republican Party over various tax proposals.

Contradictory signals from Trump sent the oil markets up and down in recent days. US crude fell to its biggest discount to Brent crude in five months last week after Trump appeared to pour cold water on the idea as “too complex”.

The next day, he said the tax would be discussed – and US crude rose relative to Brent.

Traders had speculated on the tax with an options bet that the value of US crude would rise above the global Brent crude benchmark.

Trump’s comments caused volatility in trade of those options, which in turn impacted benchmark oil prices.

Investment bank Goldman Sachs estimated in a report this week that the border tax proposal had a 20 percent chance of passing.

But White House chief of staff Reince Priebus seemed to move the president closer to supporting the border adjustment tax on Thursday, in the context of discussing how to make Mexico pay for a security wall on the US border with Mexico, his signature campaign promise.

Asked if Trump favoured a border adjustment tax, Priebus said such a tax would be “one way” of paying for the border wall. Border taxes are part of a broader tax reform plan that is being pushed by Republican House Speaker Paul Ryan as an alternative to a variety of protectionist trade policies discussed in a more ad hoc way by Trump. – Reuters