Oilpatch anxious about threat of U.S. border tax

Wednesday, January 18th, 2017

Potential consumer backlash could discourage Trump?s plans: analyst

The Vancouver Sun

Days ahead of the inauguration of U.S. president-elect Donald Trump, Canadian oil and gas companies are feeling anxious about the spectre of a U.S. border tax on imported goods, but a leading oilpatch analyst says the economic implications of such a levy are likely to dissuade the incoming U.S. administration.

Martin King, the director of institutional research at GMP FirstEnergy, said Tuesday that consumers would ultimately push back against rising prices.

“It’s unclear how that’s going to shake out, and the U.S. is still very dependent on Canadian crude oil imports, it’s still very dependent on natural gas imports from Canada,” he said. “That’s going to have to be clear to them, that it’s just going to make prices higher for everyone in the United States.”

King, speaking at an oil and gas outlook session, said there has been plenty of uncertainty on the part of energy companies assessing how an import tax would affect their bottom lines.

Trump has said he would place a broad-based tax on imported goods, potentially including oil and gas. Trump has provided little detail of the policy, but some analysts have pegged the tax rate at about 20 per cent.

King said that such a tax would be negative for Canadian oil and gas players, but ultimately would not materially shift the movement of those commodities into the U.S.

“It probably will not impact the export flows out of Canada, because essentially the market will balance itself out at whatever prices it needs to keep the imports flowing,” he said.

The appointment of former ExxonMobil Corp. CEO Rex Tillerson as secretary of state, King said, could also encourage Trump to soften his stance on an import tax. Tillerson has in the past supported policies that promote the free movement of products over borders, particularly commodities.

“It could be certainly a very informative process for Mr. Trump, in terms of having Mr. Tillerson as secretary of state.”

King said that oil markets will likely continue to edge toward a healthier balance in 2017, as OPEC and non-OPEC members say they are beginning to pare back oil output.

The agreement to cut production, reached in December last year, has “changed the psychology” of oil markets, he said.

He predicts that OPEC cuts will be far below the agreed levels, but enough to put global oil markets into a position of undersupply in 2017.

However, the open question in oil markets remains whether U.S. shale players will ramp up production, sending prices downward. FirstEnergy GMP estimates West Texas Intermediate will average US$58 over 2017, down from its earlier estimate of US$60.

King said that while U.S. production is set to rise, activity levels are not high enough to justify another collapse in prices.

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