An oil pumpjack sits unused in a field North of Edmonton Alberta February 8, 2013.JASON FRANSON/The Globe and Mail
Canada's energy sector faces a new threat as the new Republican Congress pushes a border adjustment tax measure that would encourage U.S. refiners to buy domestic crude, petroleum products and natural gas.
While president-elect Donald Trump opposes the measure, some analysts warn the coming administration may end up agreeing to it as part of a tax-reform deal with Congress aimed at slashing the corporate tax rate, a key pledge by Mr. Trump during the election campaign.
"It's going to change the pattern of trade for crude oil and products" if the policy is adopted, said economist Philip Verleger, who recently co-authored a paper on the proposed tax with the Cambridge, Mass.-based Brattle Group.
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The measure would impose additional after-tax costs on refiners to process imported crude, and make domestic gasoline and diesel less expensive than imported product, he said in an interview Tuesday. Canadian producers selling into the U.S. market would have to offer price discounts to remain competitive, he added.
The Canadian government and industry officials are aware of the proposal and are lobbying Congress and the coming Trump administration to reject it, arguing it would have severe impacts on the integrated supply chain that operates across the border.
"There isn't any good argument for a border tax, tariff or duty on Canadian energy," a senior federal official said.
Alberta's Minister for Economic Development and Trade, Deron Bilous, said the proposal underscores the need for the province to secure access to new markets outside North America.
The province will "work closely with the federal government and our industry to advance Alberta's interests with the new U.S. administration," he said in an e-mailed statement.
In an interview with The Wall Street Journal that appeared Monday, Mr. Trump called the border adjustment measure too complicated. "Any time I hear border adjustment, I don't love it," he told the paper. "Because usually it means we're going to get adjusted into a bad deal."
Many observers give it little chance of surviving, or expect exemptions for crude and other commodities if it does pass the Congress and is signed into law by Mr. Trump.
Given the president-elect's comments to the Wall Street Journal, "it seems unlikely it would make it through" to become law, said Divya Reddy, analyst with Eurasia Group, a New York-based political risk firm. "We actually had a relatively low probability assigned to it to begin with," she added.
Under the version of the border adjustment measure being proposed by House Speaker Paul Ryan, companies would be able to deduct from their corporate income tax the cost of domestic goods that they purchase, but not for imported goods. The tax rate would be lowered to 20 per cent from 35 per cent – yielding domestic producers a 20-per-cent advantage over foreign competitors in the U.S. market.
But U.S. consumers would pay higher prices for imported goods, making the measure a tough sell politically. But proponents believe the measure would drive up the value of the U.S. dollar, which would make imports cheaper and offset the border tax impact.
Mr. Verleger has calculated that, at a crude price of $60 (U.S.) a barrel, the measure would add 36 cents a gallon to pump prices, which average $2.34 on Tuesday, and it would rise if crude prices climb.
The economist noted that key nominees for Mr. Trump's cabinet, including proposed secretary of commerce Wilbur Ross, support the border adjustment, as do key representatives from oil-producing states such as Texas. Exxon Mobil Corp. announced Tuesday that it was spending up to $6.6-billion to dramatically expand its acreage in the Permian basin of western Texas, the fastest growing oil-producing region in the country.
Producers of light crude or synthetic crude would be hardest hit because they compete directly with shale oil producers in the U.S. market, while many refiners are specifically configured to run diluted bitumen from the oil sands. The tax measure would also provide an incentive for U.S. producers to export their oil so Canadian crude producers may be able to get close to world prices from refiners, said Jackie Forrest, economist with ARC Financial Corp. in Calgary.
Jeffrey Jones