WASHINGTON -- As Republicans try to figure out how to pay for a border wall with Mexico, at least one proposal under serious discussion would have a big effect on U.S. fuel prices.
Proponents of President Trump’s campaign promise of building a border wall between the United States and Mexico are trying to figure out how to pay for it after the Mexican government again refused to provide any funding. One of the latest ideas is to impose a 20% tax on imports, including crude oil, to help raise the wall’s cost, which is estimated anywhere from $12 billion to $25 billion.
The tax would target imports from countries that have a trade deficit with the United States, which would include Mexico and Saudi Arabia, according to Bloomberg.
If oil is included as part of the tax, it would mean higher costs for many U.S. refiners—and, ultimately, fuel consumers, analysts say. For example…
Gulf Coast refiners
Refiners in Texas and Louisiana would have to pass along the higher cost of Mexican oil to end users or find other sources for supply, Justin Jenkins, a research associate at Raymond James & Associates, St. Petersburg, Fla., told Bloomberg. Many of the refineries in that region are built to process heavy, sour crude, so the sweet crude from U.S. shale producers would not be able to replace it.
“Either prices would have to change or refining margins” would shrink, Jenkins said.
Gulf Coast refiners would still be in the best position among all fuel producers, according to a Reuters report, because they have access to domestic and foreign oil and are close to export markets, where they can ship out fuel tax-free.
East and West Coast refiners
Refiners on the East Coast and West Coast, who usually import most of their oil, typically have a competitive advantage to inland operators because they can buy wider variety of crude in different quantities, according to Reuters. An import tax would essentially destroy that advantage.
"Anybody who is importing crude and not exporting very much—mostly refiners on the East and West Coasts—is going to be in a worse position," Sandy Fielden, director of research, commodities and energy for Chicago-based Morningstar, told Reuters. "Their raw-material cost will have gone up, and that will eat into their margins."
Chevron, San Ramon, Calif., which has two refineries in California, is the largest importer of foreign oil. West Coast refiners such as Chevron, however, would still have access to oil from Alaska, putting them in a slightly better position than their East Coast counterparts.
John Kemp, a London-based analyst for Reuters, observed that hedge-fund managers appeared to be much more bullish about West Texas Intermediate (WTI), increasing their positions relative to Brent crude, in anticipation of a border tax.
He pointed out that Goldman Sachs analysts put only a 20% probability on a border tax being implemented without an oil exemption. If it does pass, the tax adjustment would push up the price of WTI over Brent crude by about 25%.
U.S. fuel consumers, meanwhile, could ultimately end up paying for much of the border tax.
"Assuming they are proposing to impose a 20% tax on imports on countries from which we run a trade deficit, then we can expect gasoline prices to rise 30 cents per gallon (CPG)," Philip Verleger, president of PKVerleger LLC, Carbondale, Colo., told Bloomberg.
That’s how much retail prices would have to increase -- a 13% jump -- to cover refiners’ additional costs. Diesel prices would grow 27 CPG, according to Verleger’s estimates.
Assuming refiners pass along the cost, the average consumer would pay an additional $300 to $400 per year for fuel, according to Barclays Capital.