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GOP tax proposal could alter global oil trade

Analysts say part of a GOP proposal to overhaul the U.S. tax code could alter the global oil trade. As part of their tax plan, House Republicans propose a border-adjusted corporate tax, which would lower the corporate income tax rate to 20% while exempting U.S. exports from corporate income.

The policy acts as an incentive for companies to import fewer goods into the U.S. market, but the U.S. consumes more oil than it produces within its borders.

"If implemented, the impacts on the oil market would be significant," Goldman Sachs analysts wrote in a Jan. 24 report. "A switch to [a border-adjusted tax] would immediately lead to a 25% appreciation of U.S. crude and product prices vs. global prices."

At the same time that U.S. oil prices rise relative to global oil prices, global oil prices would head lower.

"This significant incentive to ramp up U.S. production in a market that is only starting to rebalance would create a renewed large oil surplus in 2018, likely exacerbated by a reversal of the OPEC cuts," the report said. "As the velocity of shale's supply growth exceeds the ability for the rest of the world's supply to decline — especially as new projects continue to ramp up in 2017-2018 it is likely that inventory would nonetheless resume rising in 2018, driving the oil forward curve back into a steeper contango."

According to the report, the tax proposal could drive U.S. oil production costs higher, but long-term service contracts could limit cost inflation and make domestic producers competitive on the global market in the near term.

At the same time, the policy could strengthen the U.S. dollar versus other currencies by reducing U.S. demand for imported goods.

"Even an imperfect USD appreciation in the face of existing contracts would have a short-term deflationary pass-through to global production costs," the report said. "While a large decline in global oil prices would be required to help offset higher U.S. producer returns, the concurrent USD appreciation would also help soften the decline in global producer returns, in turn adding to the required decline in global oil prices to balance the market."

Economists at Goldman Sachs give the proposal a one-in-five chance of becoming law. In addition to worries about the disruption global markets would face in the event such policy is enacted, there are concerns about whether the policy violates World Trade Organization rules.

U.S. President Donald Trump commented on Jan. 16 the tax plan is "too complicated," and during a Jan. 19 senate hearing, Trump's nominee for U.S. Treasury secretary Steve Mnuchin alluded to the President's concern about the proposal's impact on domestic gasoline prices.

Analysts add the overall effect of the policy would depend on how other countries might respond to it through their own policy initiatives.

"A competition for oil revenues and investment would ... sustainably reduce the oil market's marginal cost of production and the long-term oil price level," the report said.