Dream of cheaper energy in an open market turns into nightmare.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Four years ago, Mexico’s government passed a sweeping energy reform aimed at opening up Mexico’s long-protected oil and gas sectors to global competition and expertise for the first time in over 70 years. The reforms would lead to lower energy prices for domestic consumers as well as thrust Mexico into a more prominent position in the global hydrocarbons market, the government confidently predicted.
Instead, the opposite has happened: prices of gas, diesel and natural gas have soared while Mexico’s heavily indebted state-owned energy giant, Petróleos Mexicanos, or Pemex, got tangled up in the oil bust, lost $9 billion in 2016, received a bail-out, and after making money in Q1 and Q2 of 2017, lost another $5.5 billion in Q3 2017. In other words, it has been tough on Pemex.
Production at Pemex dropped 9.5% in 2017 to 1.94 million barrels per day, its lowest level since 1980. At the same time 71.6% of the gasoline used by Mexicans last year was imported. It’s a humbling statistic for a country that not so long ago boasted the world’s second biggest oil field by production, the Canterfell.
On average, 570,600 barrels per day were bought from abroad in 2017, 60% more than in 2013. Much of it came from the US. As for Diesel, 237,500 of the 317,600 barrels sold each day came from another country — an import rate of 75% — while an average of 67% of the 2,623 million cubic feet of natural gas sold per day was imported from abroad.
Mexico’s growing reliance on energy imports could make it even more difficult for the Bank of Mexico (or Banxico for short) to bring down inflation, which reached an annual rate of 6.8% in December, almost four percentage points above Banxico’s target rate.
An analysis of Mexico City gas stations by the financial daily El Financiero revealed that regular gasoline was selling for over 17 pesos per litre at most of the pumps, compared to 16.5 pesos per litre at the beginning of the year. “The price has risen due to the impact of rising crude prices, as well as the movement of the dollar, the currency in which most of our inputs are quoted,” said Fernando González Piña, president of the National Organization of Gas Retailers (Onexpo) of the Valley of Mexico. Prices are also rising because of the extra costs incurred from delivering imported fuel in a country with as yet inadequate transport and pipeline infrastructure.
It’s not just prices at the pump that are rising; so, too, is the price of electricity. In many places prices are not just rising, they’re soaring, with some businesses complaining of a 400% hike in their electricity bill since a new method for calculating tariffs was introduced in December — another result of the Peña Nieto government’s once lauded energy reforms.
The president of Mexico’s Confederation of Chambers of Commerce, Services and Tourism (Concanaco), Enrique Solano Sentíes, has even warned that unless steps are promptly taken to turn this trend around, the rising price of electricity, which already accounts for 15% of input costs for some businesses, will have a major impact on consumer prices for products and services.
This would push Mexico’s inflation rate even higher, prompting the Bank of Mexico to raise its policy rate further (currently 7.25%), whose side effects include strangling credit growth and hurting economic activity. If this process goes on long enough, Mexico could find itself trapped in a stagflationary spiral.
This is not the only energy-related trap Mexico is currently caught in. There’s also the deadly fuel-theft trap.
The 20% spike in prices at the beginning of last year — the so-called Gasolinazo — made stealing fuel more lucrative than ever in the eyes of criminal groups. Here’s how the vicious cycle works: the more petrol prices rise, the more money there is to be made from stealing fuel from Pemex, which further weakens its financial health, in turn prompting higher fuel duties and, of course, higher prices. Rinse, repeat.
It’s not just well-armed criminal gangs that are in on the act; so, too, are Pemex engineers and local Mexican politicians, as a new report by Animal Politico reveals. In one case an armed Pemex engineer was caught trying to steal fuel in Guanajuato. He was released the same day and within 24 hours was back at work.
Pemex’s decline is ultimately a story of systemic plunder and corruption, from virtually all sides. Those doing the plundering include the firm’s executives, some of whom are already deeply implicated in the Obedrecht scandal, its unions, particular the people at the top, and Mexican politicians.
In addition, Pemex’s erstwhile crown jewels — 29 oil fields, located in deep or ultra-deep waters in the Gulf of Mexico — are about to be auctioned off, and Pemex, after decades of being plundered and starved of cash, finds itself competing with global oil majors, most of them with much deeper pockets, for resources that it once owned — and can no longer afford to develop. By Don Quijones.
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