How might the new administration make good on its promise of a lower corporate tax rate? The House has proposed funding the cut with a new border tax on imports (BAT). While taxing imports may sound straight forward, there are many less obvious details that need to be hashed out including, specifically, whether or not imported crude oil would be exempt from this BAT.
Crude oil imports
Growing US oil production from the booming shale industry over the past few years has allowed the US to reduce its reliance on imported crude oil from the Middle East, Canada and Mexico. However, the US still imports over 7 million barrels per day. While OPEC accounts for a significant amount of the imports (34%), Canada and Mexico combine to account for a larger share at 44% of imports.
While things between the US and Mexico have appeared frosty since President Trump assumed office, relations with Canada have been more favorable with Trump signing an executive order to advance the Keystone pipeline. Additionally, White House press secretary Sean Spicer has indicated that the administration would favor a border tax that would likely apply only to countries where the US has a trade deficit, which would include Mexico, but not Canada.
Implications of a tax on imported crude
If crude oil imports are taxed, the increased cost would potentially be passed on to consumers through higher gasoline prices. US refiners processing a higher percentage of imported crude would be disadvantaged versus US refiners that predominantly process US crude and wouldn’t be burdened by the tax. This preference would likely then cause domestic oil prices to rise, incenting domestic producers to increase production.
Eventually, as US producers ramp up production, domestic crude oil prices, and by extension gasoline prices, would likely come back down. However, over the near term, gasoline prices will likely increase along with the rate of the import tax, with a 20-25% tax increasing gasoline prices by $0.26-0.33 per gallon, as the US still imports a large amount of crude oil.
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