CRS INSIGHT
Import Taxes on Mexican Crude Oil
February 9, 2017 (IN10650)
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Related Authors
Robert Pirog
Paul W. Parfomak
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Robert Pirog, Specialist in Energy Economics (rpirog@crs.loc.gov, 7-6847)
Paul W. Parfomak, Acting Section Research Manager (pparfomak@crs.loc.gov, 7-0030)
In 2016, the United States imported
approximately 588 thousand barrels per day (m/d) of Mexican crude oil valued at
approximately $7.6 billion $7.6 billion. Recently, the Trump
administration raised the possibility of imposingAdministration floated the idea of imposing of a 20%
tax tax, or fee,
on imports from Mexico, presumably including
imports of crude oil
imports, to fund, to provide funding for the construction of a wall
along the U.S.-Mexican border.
If imposed, a tax on crude oil imports from Mexico could have important implications
Although subsequent Administration statements have raised doubts about this specific proposal, a tax on Mexican crude oil could have implications for the North American oil market.
TheEffects on the relative prices of crude oil in the region could
be affected enough to create
create market inefficiencies and change the incentives for related investment, production, and consumption. This Insight does
not attempt to analyze a broader 20%
border adjustmentborder-adjusted tax levied on imports
and rebated on exports from all destinations, nor does it address
possible World Trade Organization issues related to
thisthe tax proposal.
Crude Oil Trade Relationships
The United States is the largest consumer, producer, and importer of crude oil in North America. The Energy
Information Administration (EIA) reports that the United States consumed approximately 19.5 million barrels per day
(mmb/d) of petroleum products derived from crude oil and other liquids in 2016, while producing approximately 8.9
mmb/d of crude oil and importing about 7.7 mmb/d of crude oil. Canada supplied 39% of U.S. total oil imports, while
Mexico supplied about 9%. Over the last decade, imports from Canada have generally increased, while Mexican imports
have decreased, reflecting
the oil production trends in each country. In addition, the United States exported about
306,000 barrels per day of oil to Canada in 2016, while not exporting any
crude oil to Mexico.
North American Oil Trade Patterns
While the prices of specific grades of crude oil are determined in the world market, discounts or premiums on the world
price are determined regionally. Both Canada and Mexico produce and export similar—and competing—grades of
heavy crude oil. This implies that the prices of crude oil from these countries should be similar, other things being equal.
However, in the North American market, there have been significant price differences largely due to
differences in
transportation availability and costs. For example,
BloombergBloomberg reported that on January 27, 2016, the
pre-transport price of Canadian
Select crude oil in the United States was $39.21 per barrel while the price of Mexican Maya was $45.67 per barrel, a
difference of $6.46, or 16%.
Crude oil from Western Canada—Canada's primary production area—must be shipped by pipeline and/or rail to reach
U.S. refineries, while Mexican crude oil arrives at U.S. Gulf Coast refineries by ocean-going tankers. Exact cost
differentials between these transportation modes depend on distance and other factors, but general estimates suggest that
pipeline transport costs about $5 per barrel while tanker transport costs about $2 per barrel. Assuming these estimates
are applicable, much of the cost difference between Mexican Maya and Canadian Select crude oil delivered to U.S.
refiners is attributable to transportation.
If a 20% import tax were applied to Mexican crude oil, it could increase the price of Mexican crude oil by up to 20%
from the perspective of U.S. refiners. As a result, oil price and quantity adjustments across the North American market
would likely occur. The pre-tax price of Mexican crude oil could be lowered by
the amountall or some fraction of the tax, yielding Mexican
oil producers
20% lower revenues for
the same volumesa given sales volume. If this adjustment took place, the burden of the tax would be
borne by Mexico as reduced income from oil sales, but relative quantities sold to the United States would
remain the
samevary proportionately. If Mexican producers refused to accept lower returns from their oil, they could sell oil originally intended for the
U.S. market to another country that does not impose a tax, which would result in a Mexican exit from the U.S. oil
market.
If Mexico exited the U.S. crude oil market totally, or partially, Canadian producers could increase sales to the United
States, depending on the ability of Canadian oil producers to ramp up production to meet the added demand. Canada
might also expect to see a rise in the price of Canadian oil exported to the United States, likely by a small amount,
reflecting the increase in demand. If the border tax were viewed as permanent, and Canada's existing production
capability was determined to be inadequate to meet expanded U.S. demand, increased investment in production
capability could be expected, or U.S. refiners could source crude oil from other countries.
A related factor to a 20% oil import tax on Mexican crude oil is the recent issuance by President Trump of an
executive
memorandumexecutive memorandum inviting the developer of the cross-border Keystone XL pipeline—which did not receive a Presidential
Permit by the Obama Administration—to reapply for the permit. The developer has accepted the invitation
and
reappliedand reapplied. Construction of this pipeline would increase the capability of Canadian oil producers to export to the United
States. If Mexican supplies were reduced due to the tax, there would be a ready demand at U.S. Gulf Coast refineries for
more Canadian crude oil. In that respect, the Mexico tax proposal could increase demand for the Keystone XL pipeline's
transportation capacity, improving its economics
while lowering overall transport costs for Canadian crude, although uncertainty remains about the project's viability
in a period
of persistently low crude oil prices.
Conclusion
The proposed.
Conclusion
A 20% tax on Mexican oil imports
is unlikely tomight not have a major
effect on the U.S. oil market, at least in terms
of consumer prices, but it may have a noticeable effect onimpact on average U.S. consumer prices for petroleum products, but it could affect crude oil trade between the United States, Canada, and Mexico. If
Mexico
continuescontinued to export oil to the United States and
acceptsaccepted lower net prices, the U.S. Treasury
willwould gain tax revenue
and the Mexican treasury will and the Mexico would lose oil revenue. If Mexico
iswere able to find other customers for its oil in the world market
which allows allowing it to avoid
either partially, or totally, the effect of
thea tax, U.S.
tax revenue from the tax
willwould be reduced
and Mexican oil revenues
willwould be sustained.