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Congress to Tax Canadian Oil and American Drivers?

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With all eyes on today’s inauguration of President Trump, activities in Congress have caused Canada—the U.S.’s largest trading partner—to pay a little more attention to developments already underway that could see a new U.S border tax on Canadian oil.


While many Canadian oil producers may be welcoming the change in guard in Washington, more are coming to the realization that a Trump presidency could prove daunting, especially if he supports a congressional move to adopt a border adjustment tax.


The tax proposal championed by the Speaker of the House of Representatives, Paul Ryan, is part of the tax reform plan popular with Republican leadership. In it, American businesses that rely on imported goods would effectively lose the ability to deduct their costs when calculating their taxable income.


In the case of imported Canadian oil, the tax plan would drive up the cost of oil used by U.S. refiners by a whopping 25%, thereby increasing costs to those refineries who are heavily configured and invested with heavy oil feedstocks sent from Canada. The effect on Canadian oil would amount to further depressing its already discounted values, while adding significant costs to U.S drivers—especially in the Midwest, which receives the lion share of the 3.3 million barrels exported there daily.


The effect could also spell trouble for downstream refineries on both sides of the border. For U.S. refiners currently using heavy oil from Alberta—moved through pipelines and facilitated by blending with light U.S. shale oil to ease the flow back to the States—the cost of reconfiguring their refineries to run light shale oil alone could prove financially challenging, if not disruptive.

 

For Canadian refineries in eastern Canada who import some 330,000 barrels a day from the U.S., the tax on Canadian oil would inevitably lead to greater domestic demand within the U.S. for its own oil, leaving little for exports back to Canada. Indeed, Canada’s largest refinery, Irving Oil, which is thought to export 90% of finished petroleum products to the U.S. Northeast, would be blindsided by the new tax.


For Canada’s oil industry, the challenge of lower global oil prices and the country’s new love for carbon taxes, combined with U.S. tax moves, places the future of Canada’s oil industry in doubt.


Despite the United States’ historical and growing reliance on Canadian oil and natural gas, the fate of its industry may well lie in the impact to the bottom line of U.S. refiners who favor Canadian oil and U.S. motorists who may ultimately pay a steep price at the pumps for the proposed border tax.

Senior Petroleum Analyst, Canada

Dan is a skilled and noted bilingual (French and English) consumer advocate specializing in energy and current affairs. Known as Canada's “Gas Guru,” he founded tomorrowsgaspricetoday.com to better help motorists anticipate the price of gasoline in advance across Canada. He has over three decades of experience in the petroleum industry, as a parliamentarian and an analyst.