How Will US Border Adjustments Affect Oil?

Since Trump was inaugurated as the 45th President of the United States, there’s been no question over whether or not he’s a man of action. Already, he’s shut down US immigration programmes, kick-started progress on his notorious wall and vetoed foreign trade deals.

Now, the Republicans are flirting with the idea of a ‘border adjustment tax’ (BAT) that would radically change the levy landscape for oil and gas companies. Essentially, it would see the US slap taxes of up to 20% on foreign imports. Meanwhile, national exports would be exempt.

Experts peg BAT as a serious threat

While some political observers are sceptical that the BAT will gain enough support to be passed, others are worried. If it does gain momentum, it could shake up the global oil flow economy, and force foreign producers to find other markets.

As the biggest oil consumer on the planet, America consumers almost one in every five barrels of global oil. Its internal market is strong, though it’s still largely dependent on imported crude to meet around 50% of its needs. If Trump was to pass a bill approving a 20% tax on foreign imports, it could send crude prices soaring.

Burden will sit with US consumers

Currently international benchmark Brent crude trades for around US$55 a barrel, though this could jump to over US$65 with an additional 20% levy. In response, US refiners would bid up the price of domestic crude in order to match imports. While this would benefit producers, the financial burden would ultimately be passed on to American consumers. Estimates are already being thrown around, with Barclays predicting that the proposal could cost American families an extra US$300 to US$400 a year when filling up the tank.

The implications of ‘American First’

In the long run, analysts predict that higher US crude prices would prompt American companies to invest in domestic exploration projects. This would boost US production, and force major oil producing nations such as Canada, Mexico and Saudi Arabia to take their business elsewhere. It’s a bold plan, though ultimately the end scenario would fall neatly into line with Trump’s highly controversial ‘American First’ policy.

Of course, ‘America First’ doesn’t benefit everyone. Experts are warning that if US production increases, it could reignite price wars between OPEC and other producers as they compete to dominate a saturated market.

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