Why Deregulating Mexican Gas Prices Is Actually A Good Thing

OK, let me just make it clear: I feel for the people of Mexico. High gas prices suck. Raising the price of fuel would make me pretty mad, too.

But these changes are a result of something that I think needed to be done.

The reason the gas prices in Mexico jumped so high on New Year’s Day was that the Mexican government made moves to deregulate the price controls held by the gasoline industry there. In other words, the price of gas was a lot lower at the Mexican pumps than what it should have been.

The reason for this is a corporation called Petróleos Mexicanos, commonly known as Pemex. It’s the state-owned oil and gas monopoly of Mexico. It was formed in the late 1930s after the Mexican government nationalized and consolidated all of the small players in the Mexican petroleum industry at the time.

As a result of the state monopoly, pretty much every single gas station in Mexico was a Pemex station. Since Pemex controlled the price of fuel, buyers didn’t have to worry about shopping around for better fuel prices. This also meant that fuel prices stayed relatively low, as the government isn’t as concerned about overall profits being generated.

Unfortunately, Pemex was far from perfect in many aspects. Quality issues and a lack of consumer choice frustrated Mexican motorists for years and years. Sure, because the government owned Pemex, the price of gasoline was quite cheap. But there have long been accusations of Pemex stations gypping customers by rigging their pumps to deliver less fuel than expected.

In addition, the Pemex corporation itself was having some difficulties. Oil explorations and production had hit rock bottom, which severely affected their bottom line. Because Pemex actually imports most of its gasoline, this caused revenues to tank in 2015. It really was no surprise that the government of Enrique Pena Nieto was looking at taking down the Pemex monopoly.

Their first step towards the end of the Pemex dynasty came in 2014, when the Pena Nieto government allowed independent operators to commence exploration and drilling operations in Mexico. In March of 2016, the dynasty further collapsed when the Mexican government allowed gas stations to operate under non-Pemex brands and import their own gasoline.

But that’s not what Mexicans are protesting right now. Instead, what they are unhappy with is the government’s decision to remove the price controls on Mexican gasoline. As a result, fuel prices have recently risen by as much as 20 percent. This huge shock is even worse when you consider Mexican’s poorest, of which there are a lot.

You really do have to feel for the Mexican people. They’re about to experience inflation and cost-of-living increases that would bring a cold sweat to even the most financially savvy of households. It’s a big deal for the average Mexican right now.

Yet, like sending a car to the scrapper because it’s too expensive to keep running, it’s something that had to be done.

Let’s go back to those low Pemex prices. Because the government essentially had control of the price of fuel, they were selling it for less than the world market price for gasoline. In short, Mexicans were getting a bargain. This might sound like a good idea, but it was becoming a liability for the Mexican government. They weren’t realizing the true revenue potential that they
could have been had they been able to collect fuel taxes at the world market price of gasoline.

From an economic point of view, this is a loss. The people of Mexico were getting shortchanged on their own oil revenues as a result of Pemex. Yes, on the supply side, this is going to hurt for Mexican drivers. But the new flow of tax revenues (in addition to increased export potential) should boost the Mexican economy in the long run. The government can take that tax money and give it to the poor, rather than cut prices on the consumption of environment-destroying fossil fuels.

So, while it’s going to cost more to drive, deregulating the price of Mexican gas is a really good idea if you care about the environment, the economy, and the overall welfare of Mexican society. What’s unfortunate is the collateral damage that’s occurred—drug cartels have threatened to bomb filling stations, spikes in fuel sales left many pumps dry over Christmas, and the Mexican peso plummeted. While it certainly isn’t a very pleasant situation, it’s one that’s been on the horizon for a long time now. The ride on the Pemex gravy train is finally over.

#ecarnomics