What’s Happening With The Gas Situation?

pemexbrandIf you need to fuel up your car in Mexico you look for the green, white and red Pemex  filling station(pronounced peh-mecs).  There are no Exxon or Shell franchises; no mom and pop Gas N’ Gos.  Just Pemex.  Pemex, which stands for “Petroleos Mexicanos,” has been the only game in town forever. But, all of this is about to change.

Last week, Pemex–with its issues around reform, steep hikes in prices at the pump, and protesters creating blockades–became front page Mexican news.  And, it caused many of us to stop and think about what a world with limited fuel might look like.  At the same time, many snowbirds and ex-pats began to ask questions about Pemex–How did Pemex come to be, and why a price hike now?  What follows is a brief summary and analysis of the history of Pemex and the current situation in which those of us in Mexico find ourselves.

Why Only One Company?

During the early years of the 20th century, U.S. and British oil companies were quick to exploit both Mexico’s oil and  gas reserves and the Mexican labor force.  This prompted the Mexican government in 1917, during the Mexican Revolution, to nationalize and essentially make oil and gas reserves the property of the Mexican state through a Constitutional Amendment. mex-rev-women2However, it would take another twenty years before Pemex would come on the scene and Mexico would expropriate all remaining foreign-owned and non-governmental oil companies.  For the next half century, Pemex became a premier company, expanding and changing to keep up with often volatile markets and evolving industrial conditions.  They made money for the Mexican state and became a major employer of Mexican workers, offering stable jobs and good salaries with pensions and other benefits to their 150,000+ workers.  Pemex has held this virtual monopoly on the Mexican petroleum industry for almost eighty years.

What Has Happened with Pemex?

In the last decade or so, Pemex has slipped in profitability.  In 2012, for instance, the Mexican federal government received 852 billion pesos (roughly $40 billion dollars)from oil revenue.  In 2015, this figure had dropped to half that amount, only 408 billion pesos.  This is creating a situation whereby rather than make money for the country, the country faces subsidizing an aging petroleum organization and infrastructure.

While a drop in world oil prices has contributed to the slip in profitability, lack of money for reinvestment, general mounting debt, pension obligations and an over sized work force have all contributed to the continued demise of the oil behemoth.  In addition, the Cartels continue to plague Pemex operations as they create ever more sophisticated means of siphoning off petroleum from the country’s aging pipelines.  Recent major accidents, lower yields on existing wells, and the glut in the global supply have also contributed to Pemex’s inability to re-organize and keep up with the times.  Last year they experienced the worst fiscal year in a quarter of a century.

What’s with the Reforms?

By 2012 it was clear that something had to change.  Between 2012 and 2014 there were major reforms to the Mexican petroleum industry.  In 2013, the 75-year monopoly on Mexican state held oil production was lifted by a Congressional vote.  By 2015, bidding rounds began so that private companies could start to invest in Mexican oil exploration, production, and domestic sales.

How Does this Tie in with the Current Price Hike?

Up until 2016 the Mexican government subsidized the petroleum industry to such a degree that the consumer did not pay the actual cost of gasoline and diesel.  They paid a lower price.  The reforms conceptualized in 2012 and 2014 allowed the government to remove its subsidy of the industry and shift the actual cost for gasoline and diesel back on to the consumer.  The hope was that by “liberalizing” (or, de-regulating/privatizing) the gas and oil industry, and, by allowing outsiders into the Mexican petroleum process, Mexico would be able to afford to modernize and compete with prices on the world market.  And, consumers would reap the benefits down the line.  (Time will tell if this actually happens.  Theoretically, however, it sounded good to the majority of Mexicans back in 2012.)

The current price hike was originally slated to begin in 2018.  The start-up date was moved to January 1, 2017.  We can assume this was done because the government could not afford to subsidize the national petroleum industry for even one more year.

pemex-1Worst Possible Timing

Many are criticizing President Pena Nieto for his terrible timing of this price hike.  After all, January is peak driving season in Mexico; President-Elect Trump is threatening to pull out of trade agreements and introduce tariffs on Mexican goods; the peso has dropped dramatically against the dollar and is now ranked the worst currency in the world; Ford Motors will not be building its $1.6 billion plant in Mexico; and, inflation is spiraling almost out of control. President Pena Nieto has been asked, why now for this 20% fuel hike after promising that gas prices would be lower and not higher?  Why now for an abrupt adoption of the “liberalization process,” instead of the gradual process over the course of this year?

What Lies Ahead

President Pena Nieto has publicly said that he is not going to reverse his decision to increase the price of gas.  If he made a sudden policy change as a result of public pressure, it could potentially introduce too much uncertainty over future regulatory decisions into the mix. And, this might scare away potential investors. The Mexican Constitution bars Pena Nieto from running for another term.  Therefore, he has little to lose politically, and, has no incentives to back down from raising prices.

pemex3The wild card in all of this is the protest movement.  The current protests are not part of an organized movement.  Their strength is coming from transportation unions and support from social media.  If security forces double down on demonstrations and take lives or inflict injuries, it could potentially trigger more unrest.  Should an opposition party (Pena Nieto is a member of the PRI), such as the PRD (Democratic Revolution Party) jump on the protest bandwagon, it could legitimize the demonstrations making it possible to garner more support.

It is unclear right now how much longer the protest will last.  A few hours?  A day?  A week?  No one knows.  At the moment of this writing, sources say that it is a “mass display of unconnected protests,” rather than a coordinated effort at undermining energy reform.  It appears that unless these multiple organizations can pull themselves together and get the support of the PRD, labor unions, and social media, the whole thing may just fizzle out pretty quickly.

So, Pena Nieto is in an awkward position.  Does he demonstrate to investors that he “caves” to pressure from street demonstrations?  Or, does he push ahead and inflame further protests, potentially hurting his party’s (PRI) chances in the 2018 race–which is already proving to be very contentious.  The  next few hours, or, days will tell the story.

–by Linda Whedbee and edited by Lisbeth Vincent

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