A border adjustment to income tax that will see imports in the U.S. become more costly may need to be, well, adjusted, lest the country loses some key allies in the Middle East, including its second-largest foreign supplier of crude, Saudi Arabia.
Aimed at strengthening the dollar and generating money for the construction of the notorious border wall with Mexico, the income tax adjustment stipulates that businesses will have to pay income tax on products sold in the United States. At the moment, income tax is due on products made in the country when products are sold overseas.
Now, while this is great news for exporters, since they won't have to pay income tax on goods they sell in, say, Europe, it is certainly not good news at all for importers, and not just importers of foodstuffs from Mexico, which are bound to suffer from the adjustment.
No, the change would hit refiners, too, subverting President Trump's stated prioritization of the energy industry. Right now, refiners don't need to pay income tax on the crude that comes from Saudi Arabia, the UAE, and Kuwait. If the adjustment is passed in its present form, they will have to start paying, which will affect their costs, and probably prices at the pump, effectively passing part or all of the new burden on to consumers.
The simplest way to weather such adverse consequences would be for refiners to turn to local oil as much as possible. This could stimulate local production, but it would more than likely alienate Middle Eastern producers, who last year supplied over 50 million barrels of crude to the U.S. on a monthly basis.
According to RBC's head of commodity research Helima Croft, alienating these countries is unwise in light of the continuing fight with the Islamic State. She suggested, speaking to CNBC, that a loophole is provided for oil imports as a way of maintaining the currently good relations with Persian Gulf producers. Related: Has Big Oil Bought Into The Oil Price Recovery?
Such a measure could avoid the buildup of pressure at a time when pressure is more than enough. President Trump has threatened Iran with fresh sanctions following a ballistic missile test earlier this week. According to sources, the sanctions will not violate the 2015 deal Tehran struck with Western powers, and will target a selection of entities and individuals.
This is certainly good news for Saudi Arabia and its smaller allies - and U.S. suppliers - in the region, and it would strengthen the relations between Washington and these states after they soured somewhat when President Obama lifted most sanctions against Iran, in tune with his European counterparts.
The question as to why the U.S. should be so mindful of Saudi Arabia's regional interests requires a long answer if we are to be anything close to exhaustive, but let's just say that these bilateral relations are based on a long-running mutually beneficial exchange of goods and services. Last year, the U.S. had a trade surplus of US$297.4 million with the Kingdom.
But questions about the consequences of hurting Saudi feelings by making their oil more expensive for U.S. consumers become fairly irrelevant given the fact that U.S. refineries need heavy crude. The US gets this from Canada and from the Persian Gulf. There is no substitute for it-besides Urals-but that's an unlikely alternative right now, so GOP lawmakers might indeed do well to consider a loophole for Middle Eastern oil in their border adjustment draft.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
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