Mexico’s 2013-2014 energy reform triggered a deep transformation in the energy industry. The new legal framework –proposed by the executive branch and enacted by congress– establishes a transition from a state-owned and vertically integrated industry model, to a decentralized and competitive market open to both public and private investment.
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Prior to the reform, Mexico’s gasoline retail model was inefficienct. The fixed price regime prevented regional pricing adjustments, as it heavily depended on a costly fuel subsidy–roughly US$9 billion per year. Pemex was not able to recover its efficiently estimated logistics’ costs and incurred in substantial losses, which affected its overall competitiveness. Meanwhile, at the industry level, a lack of efficient price signals resulted in underinvestment throughout the value chain, restricted market coverage, and limited incentives for gas stations to improve their service quality.
In order to address and correct the previous model, the energy reform set out the gradual and orderly liberalization of gasoline and diesel prices. This crucial policy was first described in the Hydrocarbons Law of 2014, and was confirmed in the Federal Revenue Law of 2017. This last reform required a gradual and regional implementation throughout 2017, instead of a sudden price liberalization in January 2018.
What benefits does this paradigm shift entail? Gasoline prices will no longer be determined under political or fiscal considerations; Pemex and incoming companies will compete on a leveled and efficient playing field; an open business environment will trigger investment in transportation, storage and retail infrastructure; a more robust asset base will ensure supply and strengthen energy security; eliminating the regressive subsidy scheme will generate social and environmental benefits; but most importantly, market liberalization will empower Mexican consumers and enhance their customer experience at the pump.
How will price liberalization be implemented?
Mexico’s Energy Regulatory Commission (CRE) has worked with other government agencies in designing and implementing a critical path for the liberalization process.
On 21 December 2016, CRE authorized the regional liberalization timetable for the fuels market. In preparation for this approval, CRE took into consideration the non-binding opinion of the Federal Economic Competition Commission – Mexico’s anti-trust authority, COFECE – by undertaking the following actions: 1) Identifying different supply sources and routes by region; 2) Guaranteeing, via Pemex Logistics’ open season, access to existing transportation and storage capacity; 3) Disclosing the real cost of storing and delivering fuels on a regional basis, particularly where there’s insufficient infrastructure; 4) Developing and implementing a tracking system for prices and volumes transacted at gas stations; and 5) Initiating price liberalization in the northern border and progressively expanding towards the south of the country, so that liberalization starts in markets with alternative means of supply or distribution, as well as proximity to import points that might facilitate competition.
Accordingly, price liberalization will roll out in five stages throughout 2017: the first stage will get underway on 30 March in the northwestern states of Baja California and Sonora; the second stage will start on 15 June in the border states of Chihuahua, Coahuila, Nuevo León, Tamaulipas and the municipality of Gómez Palacio in Durango; the third stage will begin on 30 October in Baja California Sur, Sinaloa and the rest of Durango; the fourth stage will commence on 30 November and includes 20 central and southern states, including Mexico City, and; finally, the fifth stage, which comprises the southeastern states of Campeche, Quintana Roo and Yucatán, will kick off on 30 December.
By gradually reforming its gasoline industry, Mexico is set to join the group of countries that have chosen cost-based pricing mechanisms over inefficient subsidy schemes. This approach is endorsed by the UN, and is widely shared by Mexico’s main trading partners, OECD member states and most Latin American and European countries.
What can be achieved by liberalizing the fuels market?
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Mexican offshore platform. Photo from iStock. |
The gradual and orderly liberalization of the Mexican fuels market will result in six key benefits:
First, the industry will transition from a centralized and outdated model towards an open and competitive market. Consequently, gasoline and diesel prices will no longer be defined under political or fiscal considerations; they will now fluctuate freely and will be determined by supply and demand, in line with international best practices.
Second, Pemex and incoming companies will compete on a level and efficient playing field. Under the new model, Mexico’s national oil company will be strengthened, as it will recover its efficiently estimated logistics’ costs and reduce its losses. Moreover, new market participants will respond to price signals and identify significant business opportunities.
Third, market reform and competition will encourage economic activity and job creation, by unleashing substantial investment in infrastructure throughout the supply chain. CRE has already estimated about $16 billion in new pipeline, railway, storage and retail projects.
Fourth, a more robust asset base will ensure supply and strengthen energy security. Incoming investments will enhance Mexico’s infrastructure by increasing its redundancy and expanding its coverage. This will minimize the risk of fuel shortages moving forward.
Fifth, fuel subsidy reform will generate social and environmental benefits. For every subsidized $1 that benefited the poor, $32 had to be allocated to the wealthiest members of society. Not only was the subsidy regressive, but getting rid of it will accelerate our transition towards a low carbon economy, as it incentivizes rational driving and reduces greenhouse gas emissions to the atmosphere.
Sixth, market liberalization will empower Mexican consumers and enhance their customer experience; they will demand quality products, value the diversity of options and reward better service at the pump.
Additionally, CRE will protect customers in an open market environment. This task will be carried out coordinately with the Ministry of Finance, the Federal Attorney’s Office of Consumer Affairs and COFECE. Any uncompetitive practices or unlawful behavior will be detected and strictly penalized.
Transitioning from a fixed price regime to an unsubsidized competitive market is an unpopular policy, as short-term price increases impose a burden on end consumers. However, upholding fuel subsidies would have been financially irresponsible and environmentally unsustainable. As public officials, it is our job to make sure the liberalization process is conducted efficiently and transparently, so that Mexicans can benefit from a modern gasoline industry and enhanced competition.
At CRE, we are convinced of the positive impact and potential benefits of consolidating a strong and competitive fuels market. Implementing a gradual and orderly price liberalization strategy is a crucial step in this direction.
Guillermo García Alcocer Chairman Energy Regulatory Commission, Mexico
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