President-elect Donald Trump recently suggested that he would support a border-adjustment tax, essentially a tariff on imports in order to incentivize American-made manufacturing for export. The move could tax oil imports, while encouraging domestic producers to export at higher prices.

However, an increase in the price of crude oil could trigger significant increases in the retail prices of gasoline and diesel fuels for domestic buyers, a whitepaper released by energy and commodities expert Philip Verleger and economists at The Brattle Group concluded.

The report, funded by Koch Industries, found that Trump’s tax would be a boon to domestic oil producers, but would raise gasoline prices by 30 cents per gallon (cents/gal), or 13%, should the tax plan become law.

Meanwhile, retail prices of diesel fuel would rise by around 11%, or 27 cents/gal. However, should the world prices of crude oil rise, the domestic retail costs would increase dramatically. If crude oil prices rise to the levels forecast by the U.S. Energy Information Administration, the border-adjustment tax would be responsible for an estimated 55 cents/gal increase over what would otherwise be the case, according to the authors.

The border-adjustment tax proposal, included as part of the U.S. House of Representatives’ Tax Reform Task Force Blueprint (the Blueprint), is a new, wide-ranging legislative plan spearheaded by Speaker of the House Paul Ryan (R-Wis.) and Chairman of the House Ways and Means Committee Kevin Brady (R-Texas). The plan includes modifications to the rules on how corporates are taxed.

Under the proposed plan, corporations would pay taxes on their net revenue instead of their income tax, and the tax would be limited to the territory of the U.S. While there would be significant effects across all industries, the authors of the whitepaper assert that no industry would be more heavily affected than petroleum, largely due to the fact that the U.S. is and will remain a net importer of petroleum for the foreseeable future.

Essentially, the policy, if enacted, would be inflationary with consumers experiencing higher retail prices for gasoline and diesel.

“The economic impacts of the Blueprint as related to petroleum products will be noticeable,” Verleger was quoted as saying. “Consumers could see increases in gasoline prices of between 10% and 15% if world crude oil prices average $50/bbl. The impacts would be even greater if crude oil prices were to rise to $60/bbl or $70/bbl. Policymakers must be aware of these impacts, and be prepared for any shifts that may arise as a result of the passage of the newly-proposed legislation.”

Indeed, the Blueprint proposes a border-adjustment tax that has the potential to eliminate the tax deductibility of raw material imports (including crude oil and products) from the taxable income of domestic manufacturers. If approved, the effective costs of imported crude could rise by the percentage of the proposed tax rate (20%).

U.S. refiners would be economically incentivized to purchase domestic crude as opposed to imported crude, according to analysts, which could result in domestic crude prices being bid up to the tax-adjusted cost of imported crudes (i.e., Domestic-LLS = $55/bbl Brent plus $11/bbl tax hit = $66/bbl, WTI about $65/bbl).

“If the border tax were to be implemented, the crude purchasing economics would change, international and domestic crude prices would adjust and refiners’ feedstock could evolve,” Jeff Dietert, analyst with Piper Jaffray, said in a note recently. “Refiners with flexibility to shift from imports to domestic barrels would be advantaged.”

U.S. refiners with the largest percentage of imported crude during 2016 based on Piper Jaffray’s estimates include PBF Energy Inc. (46%), Tesoro Corp. (38%), Phillips 66 (42%) and Marathon Petroleum Corp. (31%), while Phillips 66 and Marathon Petroleum have substantial product export offsets and Phillips 66 would likely benefit substantially in its chemical segment.

Clearly, U.S. crude producers would stand to benefit from a WTI premium to Brent contributing to global market share gains as higher domestic oil prices should stimulate more rapid production growth and the need for incremental midstream infrastructure.

“We think chemical companies are positioned to benefit as the majority of the feedstocks are domestic and a large portion of the sales are exports,” Dietert said.

While not commenting directly on this proposal, President-elect Trump has stated intentions to support policies that stimulate exports and reduce dependence on imports. How much support this particular policy obtains after Trump is formally in office after Jan. 20, 2017 remains to be seen. But some industry observers assert that, even if the proposal were to become law, it would not be compliant with the Geneva-based World Trade Organization (WTO).

“WTO rules allow for border adjustment in indirect consumption taxes, such as a VAT [value added tax], but very clearly don’t permit a discriminatory adjustment in direct taxation of firms,” analysts with London-based Capital Economics observed in a note.

“As a result, if the House Republicans’ corporate tax plan was ever passed by Congress, the U.S. would immediately be flooded with formal complaints to the WTO by other trading partners,” the analysts noted.

Bryan Sims can be reached at bsims@hartenergy.com and @bsimshart.