The border adjustment tax proposal in House Republican’s tax reform blueprint is widely seen as benefiting U.S. oil producers because it would exempt exports and tax imports. But while it would favor U.S. drillers and refiners processing U.S. crude oil, it would impact refiners importing crude.
Many experts and analysts believe that refiners that depend on foreign oil are likely to pass the cost of the import tariff on to U.S. drivers by raising gasoline prices. The border adjustment tax would also lead to the U.S. benchmark WTI Crude trading to a premium to Brent Crude almost immediately after the possible introduction of the tax plan.
Most analysts, however, think that the likelihood of the border tax passing as-is in the tax reform are 30 percent or lower.
But if this piece of legislation were to pass, U.S. drivers would be the ones to pay for the cost of imports—at the pump.
“Assuming they’re proposing to impose a 20 percent tax on imports on countries from which we run a trade deficit, then we can expect gasoline prices to rise 30 cents per gallon,” Phil Verleger, president of economic consulting company PKVerleger LLC told Bloomberg by phone earlier this week.
Verleger’s company, together with The Brattle Group, issued a white paper in December 2016 discussing the impact of the border adjustment import taxation on the U.S. crude oil and petroleum products market.
“According to our calculations, the retail price of gasoline would increase by 13 percent, or approximately $0.30 per gallon, should the proposed border adjustment tax become law with a 20 percent tax rate. Retail prices of diesel fuel would rise by $0.27 per gallon or approximately 11 percent,” says the paper, which acknowledges the funding support provided by Koch Companies Public Sector. Related: Is Iran Planning On Breaking Its OPEC Pledge?
Goldman Sachs concurs that gasoline prices would go up, even if the proposed legislation would be beneficial to domestic drillers.
“You do end up with higher gasoline prices. So the question, who’s ultimately going to pay for this tax, it’s going to end up being U.S. consumers,” Jeff Currie, head of commodities research at Goldman Sachs, told CNBC on Tuesday.
Currie also warned of a mismatch that the border adjustment tax would create: refiners not wanting to import crude and wanting domestic crude, while producers would want to export it. Therefore, WTI prices would “need to move up high enough to make you indifferent between foreign crude and domestic”, the analyst said.
Earlier this month, Goldman Sachs had said that it expects WTI to move to a $10 per barrel premium to Brent from a $3 discount, a 25-percent immediate increase to the WTI price should the tax pass.
Hedge fund Andurand Capital Management also sees WTI moving to a $10 per barrel premium to Brent and U.S. gasoline prices increasing, according to an investment outlook of the firm seen by Business Insider.
Andurand says that there is a 30-percent chance that the border adjustment tax would go though. Related: The Oil War Is Only Just Getting Started
According to Bloomberg, economist Alec Phillips - a former Senate Finance Committee staffer - sees chances as one-in-five for the tax to be introduced.
Goldman estimates that there is a 20 percent probability that this tax policy would be implemented, “with the potential exemption of certain industries lowering the chances that it would impact the oil market further”.
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Senate Finance Committee Chairman Orrin Hatch said a few days ago that questions remain as to whether the border tax proposal would unduly burden U.S. consumers and businesses.
A week before taking office, President Trump had said that the border adjustment taxation was “too complicated”, The Wall Street Journal reports.
It may really turn out to be too complicated, especially if U.S. gasoline prices increase by US$0.30/gallon.
By Tsvetana Paraskova for Oilprice.com
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