Tax Reform Progressing at an Aggressive Pace

by Denise A. Bode & Anne C. Canfield

On November 2, House Republicans released their tax reform bill titled, “Tax Cuts and Jobs Act.” Michael Best Strategies’ (MBS) tax policy experts, Denise Bode and Anne Canfield continue to provide constant updates to their tax analysis charts in this tax reform update. This past week, on November 16, the House of Representatives passed “Tax Cuts and Jobs Act” (H.R. 1) as approved by Ways and Means Committee by a vote of 227 to 205. On November 16, the Senate Finance Committee passed their version of the “Tax Cut And New Jobs” act by a vote of 14-12.

Next week, the Senate Budget Committee will review the Senate Finance Committee passed bill to ensure that it complies with the requirements set forth in the FY2018 Budget Resolution. The week of November 27, the full Senate will consider the Senate Finance Committee passed bill on the Senate floor.

There are two possible pathways once the bill is on the Senate Floor: (1) The Senate passes a bill, with any amendments that may be added by the full Senate.  The conferees are appointed for a House-Senate Conference Committee to resolve any differences between the two bills.  Once the Conference Report is put together by the House-Senate Conference Committee, the Conference Report will then go back to the full Senate and U.S. House of Representatives for an up-down vote on the Conference Report, which is not amendable.  (2) The second and, potentially, more likely pathway is that the House and Senate pre-conference the bill. Any changes that the House wants to make to the bill would be included by the full Senate during its consideration of the Senate Finance Committee-passed bill. The final tax reform bill would then be passed by the full Senate and then passed by the U.S. House of Representatives, thus avoiding a second vote in the Senate, which might be critical to the ultimate success of getting a final tax reform bill enacted.

Click here to see the MBS Analysis of the House-passed bill and the Senate Finance Committee-passed bill.










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                  FROM THE CHART ROOM

                  Transportation Constraints Impacting Crude Pricing



                  In its November Short-Term Energy Outlook (STEO), EIA forecasts the price difference between West Texas Intermediate (WTI) crude oil priced at Cushing, Oklahoma, and Brent, the global crude oil price benchmark, to remain at $6 per barrel (b) through the first quarter of 2018.The wider forecast spread reflects continuing price developments that have emerged over the past two months that likely resulted from transportation constraints in moving domestically produced crude oil from Cushing, Oklahoma, and from the Permian basin in Texas to the U.S. Gulf Coast. Although many other factors can affect WTI, Brent, or both crude oil prices at any given time, near-term changes in the Brent-WTI price spread will generally be derived from either changes in pipeline capacity or U.S. crude oil production.

                  As U.S. crude oil production has increased, particularly in regions such as the Permian basin, so has the need for more transportation infrastructure to accommodate it. However, the rate of production growth and the scale and timing of when additional pipeline capacity is brought online are not always aligned. EIA estimates that, without pipeline constraints, moving crude oil from Cushing to the U.S. Gulf Coast typically costs $3.50/b, but it has become more expensive as transportation constraints have developed. Total commercial U.S. crude oil inventories declined by 25 million barrels from the last week of July to the week ending November 3, but inventories in Cushing increased by 8.8 million barrels. The inventory builds at Cushing have pushed its inventories 51% higher than the five-year average, while inventories for the United States as a whole and in the Gulf Coast region are only 15% and 10% higher than their respective five-year averages.

                  Another factor affecting the Brent-WTI spread is the transportation of light sweet crude oil from the U.S. Gulf Coast to Asia. With the removal of restrictions on exporting domestically produced crude oil in December 2015, additional supplies of light sweet crude oil that cannot be economically processed at U.S. refineries or transported domestically can now be exported. Once exported, WTI competes with Brent directly in the global market. U.S. crude oil export data suggest that WTI’s and Brent’s marginal competitive market is Asia. So far in 2017, China is the second-largest destination for U.S. crude oil exports at 173,000 barrels per day.To compete with Brent in Asia, WTI prices must reflect the additional transportation costs U.S. crude oil exports incur on their way to Asia. Although more infrastructure to export crude oil has been built recently, U.S. exporters must still use smaller, less-economic vessels or complex shipping arrangements, which add to costs. EIA estimates that it costs approximately $0.50/b more to transport WTI from the United States to Asia than it costs to ship Brent from the North Sea to Asia.  LINK TO EIA



                  Michael Best Strategies’ Energy Team

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