2017 Marks Mexican Deregulation of Oil and Gas Industry

Posted by PortVision

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The government of Mexico began the new year with a move to begin deregulating the energy sector. The change in policy will eliminate fuel subsidies and price controls to allow prevailing international gasoline prices to manage the market. This will kick up Mexican fuel costs as much as 20%. It is the first such government move since 1992 when the government controlled inflation by setting a ceiling on the maximum allowable price of fuel.

Pushback from the public on this move was immediate and included blockades at gas distribution terminals, seaports and transportation routes. As well, some people stockpiled gas before prices jumped any further. According to UPI the Mexican government's move will raise the maximum allowable price of fuel, with regular gas prices hiking up 14%, premium 20%, and diesel 17%. For example, the price of regular was $2.60/gallon at the end of 2016. It is now $2.95 and quite high when compared to the average salary of a working person. According to a Bloomberg research study, of 59 countries, Mexicans and South Africans already spend more on gasoline than the others, and twice as much as Americans relative to their incomes.

The government hopes that this move will attract more foreign investment in their oil and gas industry. Mexican President Enrique Pena Nieto's decision reverses 79 years of central control of the country's oil industry. At that time, the government nationalized the industry and evicted all foreign firms involved in oil and gas. Mexico now imports over 50% of its gasoline on the world market. Theft by drug cartels and crime groups from state-owned Petroleos Mexicanos (Pemex) via tapping pipelines, has been rampant and increased by seven times in 2015. The $1 billion a year losses drove up gas prices and, therefore, subsidies.

The subsidies were, according to the President, causing major budgetary problems and he wanted to avoid cuts in health care and welfare programs with this move. As reported in Bloomberg Businessweek, the cost to the government for these subsidies was $9 billion annually. Economists predicted that Mexico will experience its slowest economic growth since 2012 – this move should help to stabilize its increasing debt.

Long term, officials in the Mexican government expect that prices will become more reasonable once competitors return to the country and build new import terminals and pipelines as well as engage in oil exploration. They also expect that this move will generate local and foreign innovation in renewable energy.

As reported by MSN, government and business leaders have agreed not to increase the cost of basic goods despite the higher fuel prices in order to temper public dissatisfaction, for now.

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Posted on Mar 28, 2017, 6:07:00 AM

Topics: oil, Crude, Gasoline