The United States could find itself with few friends in the Middle East if Republicans pass a border tax without carving out loopholes for oil imports, Helima Croft, RBC Capital Markets global head of commodity strategy, said Thursday.
The so-called border adjustment tax would put a tariff on imports, but not exports. That system would favor U.S. drillers and refineries set up to process American crude into gasoline and other fuels.
"I think the Saudi government is probably very happy with the Trump administration," she said. "This is the one issue where I think that you could really see a problem in the U.S.-Saudi reset relationship."
U.S. relations with Saudi Arabia deteriorated under the Obama administration, which brokered a historic deal with Riyadh's regional rival, Iran. That accord allowed Iran to expand its oil exports and relieved pressure on its economy.
Croft said Secretary of State Rex Tillerson and Defense Secretary James Mattis could push the White House and Republican lawmakers to create a carve-out to the border tax for oil imports. They could argue the loophole is necessary for national security as the Cabinet seeks deeper cooperation with Gulf allies on fighting Islamic State militants, she said.
The White House already raised tensions with Iran on Wednesday, putting Tehran "on notice" over its ballistic missile tests and intervention in Yemen's civil war. Implementing the border tax would further complicate U.S. relations in the Middle East.
"So not only do we have this hostility with Iran, we have no friends in the Middle East" if the border adjustment tax passes with no oil loophole, she said.
In 2015, nearly 16 percent of U.S. crude imports came from Persian Gulf countries. Saudi Arabia was the largest single-country oil exporter to the United States, after Canada.
Croft also noted that Gulf Coast refineries process heavier crude, including Saudi oil. Since American drillers tend to produce lighter crude, there is no U.S. substitute for Saudi supplies.