Just as the gasoline market is opened to competition, Mexico becomes one of the worst places in the world for fuel theft.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Mexico’s black market for black gold keeps getting bigger. In 2017, 10,363 illegal pipeline taps were found, 50% more than the 6,873 found in 2016, according to data from Petróleos Mexicanos (Pemex). In other words, an average of 28 new pipeline taps were found each and every day last year. Most of them are into gasoline pipelines. And those are the taps that were found. Many more are presumed to be in operation but are yet to be detected.
The reach of the fuel thieves — often referred to as “huachicoleros” — has grown exponentially, according to Pemex. Five years ago just 1,635 illegal taps were found and they were almost exclusively located across four strategically located states (Guanajuato, Puebla, Veracruz and Jalisco). Since then the huachicoleros have gone national and now have a presence across many of the nation’s 33 states.
Mexico is one of the worst places in the world for fuel theft. Those doing the plundering include armies of amateur opportunists who live close to the major pipelines that crisscross the country as well as some of Mexico’s most ruthless and organized drug gangs, who receive logistic help and support from local politicians and Pemex contractors
Often Pemex employees are hired to do the more specialized — and dangerous — work. First they dig and uncover a section of a pipeline, then they drill into it and install a tap. When that is done, they camouflage the operation and then start filling containers which can be distributed by a network of roadside peddlers. In one of the more audacious recent incidents, in Queretero, one of Mexico’s biggest and fastest growing industrial centers, thieves directly tapped pipelines on a Pemex gas station.
The massive increase in fuel theft since the Mexican government liberalized the price of gasoline in January 2017 has had a big impact not only on prices at the pump but also on spending undertaken by both the government and Pemex to try to halt the crime spree. Since 2008, Pemex has spent 28.3 billion pesos ($1.5 billion) on 15 programs aimed at tackling fuel theft, but to little avail. Despite the firm’s increasing use of costly pipeline tracking systems, radar, drones, planes, boats and other tactical vehicles, the number of illegal pipeline taps has risen by over 20-fold in the last decade.
This trend is generating notable distortions in the market price, says José Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth (IDIC). The logistics costs of fuel production and distribution spike as a result of spiralling security costs — costs that first fall on Pemex, for now the only producer and supplier of gasoline in the country (despite the entry of new players into the sector). Those additional costs are then passed on to the owners of the gas stations and finally on to consumers.
In 2017 alone prices surged on average by 17%, largely the result of the government’s decision, on the first day of that year, to withdraw public subsidies that had helped keep gasoline prices artificially low in Mexico. The result was an instantaneous 20% surge in prices, which triggered nationwide riots and blockades of fuel depots. It also gave a almighty boost to Mexico’s already buoyant black market for gasoline.
The more the black market grows, the more expensive it becomes for Pemex and the government to counter it, which in turn fuels higher prices at the pump, providing a further fillip to black market vendors.
The petro-plunder is also discouraging private investment, especially in Mexico’s refinery sector, a long-neglected industry which is sorely in need of new funds. “At the end of 2017, Pemex’s refineries were operating at 51% of their capacity,” says Alejandro Limón Portillo, a specialist in energy issues and public finance at Mexico’s Center for Economic and Budget Research. “The refining sector is sending a clear message that it needs more investment, but nobody wants to listen because of the ‘huachicol’ threat”.
As long as the sector continues to perform at such chronic levels of under-capacity, Pemex’s dependence on imported gasoline will continue to grow. Last year 71.6% of the gasoline used by Mexicans was imported. 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.
It’s a trend that shows little sign of changing. The only company that has taken the plunge so far in Mexico’s refining sector is the Japanese conglomerate Mitsui, which in January signed a partnership agreement with Pemex to develop and operate a coking plant at Pemex’s second largest refinery, in Tula. Other than that, no other foreign investment has been made in the sector.
Mexico’s rampant fuel theft also creates unfair competition for those who are investing big bucks in the gas station sector, including many of the world’s oil majors, says José de la Cruz. At the end of the day, the stolen fuel returns to the Mexican market, but at a sharply discounted price (usually 50-70% of the price at a gas station). The huachicoleros do not even bother to hide its origin.
Gas theft represents one of the most lucrative sources of funds for organized crime in Mexico, a country that has spectacularly failed to combat the rise of organized crime in the last 30 years. If Mexico’s black market continues to grow, it’s only a matter of time before new entrants into Mexico’s gas station market begin getting cold feet. By Don Quijones.
If this merger goes through, three companies to control 60% of the world’s seed and pesticide markets. Read… The Oligopolization of Food Supply Hits a Snag
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.