January 26, 2017

by David Hackett

The recent rise in gasoline prices in Mexico has driven significant unrest early this month. However, north of the border (where gasoline prices are higher than they were last summer), they are still cheap. What’s going on in Mexico?

There are several factors contributing to the crisis. The Mexican government still sets the annual retail price of gasoline and diesel. In late December, on schedule, government authorities announced the price for 2017. This price, in Mexican pesos, is a 14% increase for regular gasoline and 20% for premium. This increase was enough to spark riots, looting, and calls for the resignation of the President. According to Stillwater’s contact in Mexico City, people were frustrated by other social issues and the poorly explained gasoline price rise was the last straw.

The gasoline price rise, called a “gasolinazo,” meaning a fuel price slam, comes on top of a dramatic 20% decline of the peso, relative to the U.S. dollar. People are worried about their ability to purchase regular goods. One protestor in Mexico City told The Guardian why citizens were outraged with the sudden price increase because it impacts the price of other consumer goods and services. “It’s not because we all have cars,” Héctor Pérez told the Guardian. “When gasoline prices go up, everything else goes up: tortillas, public transportation, everything.”

The government is implementing its liberalization policies as part of the energy reform program that puts an end to Pemex’s monopoly. According to Reuters, the ministry’s price ceilings will be in effect through February 3rd. After that, the maximum price will be set bi-weekly, until February 18th, when it will be set daily. “It’s an important change,” Finance Minister Jose Antonio Meade said in a local radio interview. “It’s a change that will allow prices to reflect costs, and avoid artificial distortions.” Analysts said the liberalization program was likely to have an impact on inflation, which has already passed the central bank’s 3% target due to sharp peso depreciation.

Mexico imports more than half its gasoline and 40% of its diesel fuel, largely from the U.S. As an importing country, Mexico must pass along world market oil prices through to the consumer. As the maximum gasoline price continues to change, the price should reflect the world market. But, what happens next? How will Mexican’s react to frequent price changes, especially when the price rises? We’ll be watching this space closely.