OREANDA-NEWS. August 28, 2015. Disclaimer: This post in no way, shape or form is an endorsement for or against Donald Trump or any other presidential candidate, for that matter. Nor is it an endorsement of this made-up “wall tax.”

By now, you know the spiel. The Republican front-runner for US president, businessman Donald Trump, insists he is going to have a wall built on the US-Mexico border and he is going to make Mexico pay for it. But how? Here’s an idea for Mr. Trump – one of the first places to look is refined products.

Throwing aside all politics, Trump, and whether or not this wall is even needed, one obvious problem to the plan would be the price tag and how to get Mexico to underwrite the cost. The National Journal once estimated the price tag for such wall would be a whopping \\$6.4 billion (you can say that price tag in your best Dr. Evil voice).

However, Mexico is the top destination for US’ gasoline, diesel and LPG.

What about adding a special “wall tax” to Mexico’s imports of gasoline, diesel and LPG from the US?

When it comes to taking in refined products from the US, Mexico is somewhat of a captive audience. Its refined product growth has grown 40% in the past 10 years, vehicle supply in the first quarter of 2015 was up by more than 20%, Jose Manuel Carrera Panizzo, CEO of PEMEX’s trading arm PMI, said at the Platts North American Refined Products Conference in Houston in May. Meanwhile, pipeline infrastructure has only grown 3% and the company announced in February that its five refinery projects are on hold due to budget cuts following the falling price of oil.

Mexico can only meet 400,000 b/d of its 800,000 b/d gasoline demand domestically and 250,000 b/d of its 400,000 b/d diesel demand, according to PMI. That means imports must meet the rest of the demand, and the US is by far the No. 1 source for that. In 2014 the US sent 121,000 b/d of ULSD to Mexico along with 196,000 b/d of gasoline. Add on top of that another 66,000 b/d of LPG.

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So clearly there is a big dependency on the US and its abundance of refined products.

Adding a tax of 16 cents/gal to all Mexican refined product imports from the US, the US could have made \\$777,981,120 in 2014 toward the building of the Great Wall of America. Add that up over eight years, two presidential terms, and you get \\$6.22 billion, essentially the cost of building the wall.

Though if the tax is too much, Mexico has plenty of other alternatives it can turn to – Singapore and South Korea on the West Coast of Mexico, Europe and the Mediterranean on the East Coast of Mexico and the Middle East on both Coasts. There’s also an upgrade going on in Cartagena, Colombia, that could add 50,000 b/d to the market.

PMI has the ability to look at the arbitrages and pick the cheapest way to obtain supply. That’s why the tax rate would have to be chosen very carefully. US refiners would not be happy campers if the government priced them out of their No. 1 export opportunity.

Based on recent numbers, a tax of about 7.5 cents/gal puts the US products at a higher level than its counterparts in Europe and Asia even after freight is added in.

Any tax higher than 5 cents/gal is probably pushing it. At that rate, US-based refiners can still be more competitive to Mexico than their overseas counterparts year-round.

Using assessments from August 20, ULSD out of the Gulf Coast, for instance, would be \\$62.63/barrel with the 5 cents/gal tax thrown in, well under Europe’s diesel assessment plus freight (\\$64.64/b).  Why would Eastern Mexico want to look elsewhere?

Diesel on the US West Coast plus the tax (\\$64.65/b) is still well under the \\$70.98/b cost of Singapore diesel plus freight (all numbers using Platts data). Therefore, if Western Mexico is looking for barrels of diesel, the US West Coast is still a more viable option than Singapore even with this hypothetical tax.

If you use the same numbers from 2014 with the 5 cents/gal tax rate, the US could have netted \\$242,980,500 in taxes from the exports to Mexico on gasoline, ULSD and LPG. If you add that up over eight years, two presidential terms, it becomes \\$1.945 billion.

Now that is well shy of the \\$6.4 billion needed to complete the wall — but hey, it’s a start. It’s up to Mr. Trump to come up with the rest. We hear he’s rich.