GOP's Tax Reform Plan Brings Uncertainty to Oil, Gas
But critics say the plan is so short on details that it’s hard to say what it represents. Indeed, no bill has been filed. And there is concern the proposal is all-too-likely to raise the price of gasoline, and ultimately, set the stage for a recession.
The president has pledged to reform corporate taxes reform, but he’s not quite on board with the GOP’s reform package. In January, Trump told the Wall Street Journal the tax was too complicated.
“Anytime I hear border adjustment, I don't love it,” he told the newspaper.
Analysts at Credit Suisse (CS) said this month their outlook for 2017 shows political risk on the rise.
“U.S. President Trump, for his part, has wasted no time introducing a bit more uncertainty since his inauguration January 20,” they said. “Most pertinent for oil markets, so far, is the uncertain prospect of a border adjustment tax regime being imposed on trade with the U.S.”
A realignment between WTI and Brent would immediately benefit domestic oil and gas producers, who would finally get a higher price for their product when selling it locally.
“You could easily see a boom in domestic production,” said John Gimigliano, head of federal legislative and regulatory services at KPMG LLP. “But on the flipside, if you don’t buy the currency issue, what does this do to the refining sector? Either way, there is a demand in the U.S. for finished products that is not going to go away. In fact, Congress is arguing that the plan would increase [gross domestic product] and that in turn would increase that demand.”
Analysts at Goldman Sachs (GS) said U.S. exploration and production (E&P) companies could see as much as $20 billion each year in extra cash flow. But even that could cause problems, GS said.
“We assume that U.S. producers would re-invest cash in incremental activity, driving higher U.S. production, cost inflation and ultimately lower global oil prices,” they wrote in researching the proposal.
But refiners, especially those that are miles away from the coast and depend on foreign-sourced crude, could see more downside than other sectors, Gimigliano said.
“Under current law, if I buy [crude] for $50 and then I sell the finished products for $100 – today, I’d have $50 in income subject to tax at a 35 percent rate. Under the border adjustable tax, if I buy it for $50 and sell it for $100, I don’t get any deduction for the imported crude. I would have $100 of taxable income taxed at a 20 percent rate,” he said. “So I double the amount of taxable income I have under that scenario but tax it at a lower rate. That’s the big implication for the import side.”
It creates an incentive for refiners to buy “Made in America” crude, said Regina Mayor, KPMG’s global sector head and U.S. national sector leader of energy and natural resources.
“That means that U.S. supply potentially becomes more valuable inherent to Saudi or high sulfur grades that come from Mayan crude in Mexico, and there is a strong belief that WTI will start trading at a higher differential and it will exceed Brent because there will be this constrained, non-free market requirement that incentivizes refiners to buy these ‘Made in America’ molecules,” she said. “That’s a net positive for the U.S. producer, but that cost can get passed on to the American consumer, and it will result in much higher gasoline prices. It can’t be absorbed into anything else.”
View Full Article
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.