CAPE CORAL, Fla. -- As Mexico deregulates its oil industry, it is opening the largest fuel opportunity in recent history in the Western Hemisphere.
Petróleos Mexicanos (Pemex), Mexico’s state petroleum company, controls the transportation fuels distribution system. Until now, the government had set the cost of fuel and its corresponding retail price each year and adjusted it monthly as needed. But in 2017, retail prices will be increasingly deregulated.
For the first time, foreign companies will be allowed to own fuel assets, and companies can sell fuel branded and sold by suppliers other than Pemex. The downstream will open to new fuel marketers and new retail brands, changing the market landscape completely.
This is a tremendous opportunity for the oil industry, especially for refiners near the border who will be able to bring product in directly without selling it to Pemex. Considering that less than half of fueling stations in Mexico have a convenience-store offer, there is clearly an opportunity for our industry—that is, if the Mexican consumer begins to associate the fueling and product shopping occasions as one.
Ultimately, the greatest opportunity is for consumers, who are expected to benefit from increased supply and competitive pricing. Of course, the devil is always in the details, and deregulation has gotten off to a very rocky start.
Let's take a look ...
The first year
The first two years of the deregulation process was largely invisible to the Mexican consumer. In the first year, the government allowed retailers to discount fuel prices, selling from as low as cost to as high as 6.5% above cost. While many retailers began offering discounts as high as half of their margin, most retailers did not.
In the United States, this would have caused the nondiscounting retailers to close. However, it is an open secret in Mexico that you do not always receive the full liter of fuel that you purchase. To a large degree, consumers perceived that the retailers who offered discounts were making up for it elsewhere, and most believed that they were receiving less fuel than they purchased. Therefore, my studies show that retailers who did not offer a discount lost only 15% to 20% of volume to those who did.
Removal of subsidies
In year two, the government began issuing permits for foreign companies to begin bringing fuel into Mexico. Practically none of these permits were acted on, however, because these companies saw the tight regulation of pricing to be an impediment to their ability to generate enough profitability to justify their investment. Therefore, the government decided to speed up the deregulation process, beginning with fuel price.
In 2017, costs (and their corresponding retails) are now set weekly, and the maximum price a retailer can set is only 5.5% over cost. Movements in the foreign market now set these costs. Meanwhile, the government has removed subsidies. The result: Retail prices jumped 20% on Jan. 1, and the Mexican consumers jumped out of their skin.
In what is referred to as “el Gasolinazo,” citizens began mass protests across the country, closing highways, disrupting supply and vandalizing and looting stores in their path.
Hundreds of protestors descended on the San Diego/Tijuana border, taking control of Mexican Customs and forcing a southbound border shutdown. Thousands of returning Mexicans were forced to turn back and seek out alternative border-crossing points. And that was neither the worst nor the end of it.
In Rosarito, Mexico, demonstrators gathered at the Pemex refinery. In Puebla, a group of at least 20,000 demonstrated against the price increase and looted businesses. Police were even caught on video filling up patrol cars with ransacked merchandise. Store owners armed themselves and roughly 20,000 businesses shuttered because of the violence.
An example closer to home
Much of the pain of deregulation could have been averted, and I will use a simple example to illustrate: New Jersey’s recent 23-cent-per-gallon (CPG) tax increase.
In February 2016, New Jersey Gov. Chris Christie, above, proposed a budget for the fiscal year without identifying a source of revenue to replenish the state’s Transportation Trust Fund, which is used for highway and transit projects and was projected to go broke that April. But in fact, he and the state legislature spent months negotiating a boost in the gasoline tax to fund it.
The tax increase passed in October and was set to go into effect Nov. 1. That Halloween, I saw drivers lined up around the block, looking to fill up before what many considered an excessive tax increase. Headlines blared “Largest Gas Tax in N.J. History Now in Effect” and “New Jersey Tax Proposals Anger the Right and the Left.”
What New Jersey should have done
The New Jersey government knew it was going to raise the tax; the only unknown was the amount. If gasoline retailers and the state government had worked together, the tax increase could have been invisibly implemented with no resulting grief from residents. Retail gas prices started to drop in June; this could have legislatively been funneled to tax increases that could later be resolved upon approval.
The governor knew there would be a tax increase necessary. Why not do it in a way that least affects families?
What Mexico should have done
Mexico had this same opportunity. The government should have phased in the price adjustment over the first two years of deregulation, rather than in a 20% spike, which was sure to upset the street.
The trade group representing gasoline retailers, Onexpo, would be the logical party to lobby for a better transition plan, but Pemex and the government are one and powerful. Protesters focused on Pemex and the government while largely sparing retailers, who were more harmed by supply interruptions.
In the United States, retailers are lucky to be represented by trade associations such as NACS. Without a strong trade organization, who can imagine the myriad potential gouging and below-cost laws that could run amok? Or worse: With the new administration’s planned infrastructure projects requiring funding, will we act more proactively and learn from Mexico—or maybe even New Jersey?