Mexico’s price controls
The Mexican government has left an important
question open in its historic effort to transform the
state-centered oil and gas business. It sets oil and
gas prices and has said nothing about stopping the
practice. A continuation of price administration
would compromise the liberalization President Enrique Pena Nieto seeks for oil, gas, and electricity.
But leaving the issue in suspense might be wise.
Resource nationalism shows no sign of weakening in Mexico, where it has driven politics since
nationalization of the oil industry in 1938. Yet the
government recognizes Mexico is missing the opportunity to develop rich oil and gas potential in
deep water and in unconventional reservoirs onshore. Petroleos Mexicanos, the state oil and gas
monopoly, can’t afford large investments. The outsize expenses of a bloated bureaucracy and heavy
claims by the government devour its revenue. And
with joint ventures by private operators precluded
by law, Pemex’s access to technology is limited to
what it acquires under contracts with service providers working on existing projects.
Watching northern booms
Pena Nieto’s government thus must watch booms
in deep water, low-permeability reservoirs, and oil
sands expand spectacularly to Mexico’s north while
Mexican production, limited to mostly mature conventional plays, declines. The business regime must
But Pena Nieto, head of the Institutional Revolutionary Party (PRI), is moving cautiously. Another party, the National Action Party (PAN), has
proposed more-aggressive reform. A third group,
the Party of the Democratic Revolution (PRD), opposes all but limited change. Together, the PRI and
PAN control enough votes in Congress to pass essential constitutional changes.
Speakers at a Sept. 13 seminar held in Houston
by the law firm Mayer Brown described the presi-
dent’s strategy as politically shrewd (OGJ Online,
Sept. 13, 2013). They pointed out his proposal re-
turns relevant parts of the Constitution to nostalgic
wording put in place after nationalization of the oil
industry, simply expunging laws passed later. The
plan keeps ownership of oil and gas resources with
the government, precludes concessions, and leaves
to Congress the making of energy policy and deter-
mination of participation terms for outsiders. Pena
Nieto’s approach thus honors nationalization, con-
fines the initiative to constitutional reforms requir-
ing two-thirds votes in Congress while essential
support is in place, and leaves more-contentious
change to legislation needing simple majority votes.
With privatization, as one of the Mayer Brown
speakers noted, “still a dirty word” in Mexico,
politics of the secondary legislation will be tricky
if Pena Nieto’s constitutional changes are passed.
Price controls could become at least a lever of political influence if not an element of actual reform.
In a recent article, analysts at the Federal Reserve
Bank of Dallas traced gasoline and diesel prices set
monthly by the Mexican government since 1995.
Until 2006, those prices exceeded costs of production. Since then, prices have been below production costs, the fuels effectively subsidized. Varying
greatly in that period, subsidization values have
averaged about 40¢/gal for gasoline and 59¢/gal for
diesel, write Michael D. Plante, research economist,
and Amy Jordan, research analyst in the Dallas
Fed’s quarterly Southwest Economy. Since 2010,
the government has gradually increased fuel prices,
aiming to remove the subsidies. The effort brought
gasoline and diesel prices to near global parity this
year without provoking major political unrest.
With Mexican consumers lately accustomed to
market values, the government might profitably
see price administration as additional reform worth
pursuing. Plante and Jordan pointed out subsidies
are costly to governments, help the wealthy more
than the poor, and aggravate air pollution by stimulating fuel use. They recommended replacing fuel
subsidies with targeted payments to the poor. Doing so would broaden and strengthen the reform
program under discussion.
Chances are better politicians will find control
of fuel prices too convenient a tool to surrender
during a political struggle. Indeed, price suppression might ease opposition to other reforms. Such
a tradeoff would be better than failure to change
anything. For Mexico, status quo means losing