U.S. President Donald Trump has plans to support domestic oil and gas industry, job creation and local manufacturing in his America First agenda. One proposed House Republican corporate tax reform, however, may lead to radical changes in U.S. crude oil and petroleum products flows and thus, in the global markets.
The so-called border adjustment tax is part of the proposed legislation that has drawn the most attention, analyses, and contradictory opinions. If this legislation passes as-is, companies would not have to calculate revenue from exports in their tax base, but would be unable to deduct the cost of their imports. Although the border-adjustment tax is intended to boost American manufacturing, it would essentially tax imports, and U.S. refiners importing crude oil would certainly feel the pinch.
The U.S. still imports lots of crude oil – even if volumes are lower than 10 years ago – and will continue to do so in the near future. Imports in October 2016 were 7.607 million bpd, the latest available data by the EIA show. Exports of crude oil were 491,000 bpd that same month, while exports of crude oil and petroleum products reached 4.942 million bpd.
According to a recent report by PwC, the border adjustment proposal would have a notable impact on the energy industry. Companies that export crude oil as well as those that manufacture and export refined products, equipment and chemicals would benefit from the provision. But companies that import equipment and crude oil for refining and processing would not be able to deduct import expenditures, PwC says.
Economists think that the proposed tax would further strengthen the U.S. dollar, thus leading to lower costs of imported goods and “little or no net change in the after-tax cost of imports”, PwC noted.
Still, PwC said:
“Despite the benefits, the potential of the border adjustment for short-term economic disruptions is the subject of much debate.” Related: Saudi Energy Minister Says 1.5M Bpd Of Oil Off The Market Now
Controversies are many regarding this particular tax proposal, and even President Trump, in a recent interview with The Wall Street Journal, criticized the House Republican plan, defining it as “too complicated”.
The Koch brothers have warned that the border adjustment tax could lead to higher gasoline prices.
In a report funded by Koch, energy economist Philip K. Verleger argues that “No sector, though, will be more affected than petroleum” by the border tax plan. Verleger says that consumers on the U.S. East Coast, the Upper Midwest, and the West Coast would continue to be supplied with imports of petroleum products. “Refiners located in these regions will also rely on imports of crude oil from abroad,” the economist notes.
In his ‘2017 State of American Energy’ address, Jack Gerard, President and CEO of the American Petroleum Institute (API), said earlier this month:
“As the incoming administration and new Congress look to work together to reform the nation’s tax code, we’d hope that any changes will make America more globally competitive, are evenly applied and mindful of the important role the oil and natural gas industry plays in job creation and economic growth.” Related: Will Offshore Wind Continue To Grow Under Trump?
While analysts say that the exact impact of the tax reform on the oil industry is very difficult to predict, they feel it unlikely that legislators would pass any regulation that would raise the price of gasoline for American consumers.
Peter Cohn, an energy analyst with Washington-based investment company Height Securities, has recently told Reuters: “I don’t see this mix of leadership figures in the House, Senate and the White House, doing something that has the effect of raising gasoline prices.”
According to Gregory Jenner, a partner at Stoel Rives who helped draft a 1986 tax reform plan, as quoted by Platts:
“What this new tax provision would do would be to completely upend that arrangement. That could be for the good, it could be for the bad. We just don’t know.”
With President Trump now in office, the new Administration and the House Republicans will need to be ever mindful of how this proposed legislation will impact the U.S. petroleum industry and crude oil and oil product flows.
By Tsvetana Paraskova for Oilprice.com
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