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July 6, 2018
Mexican Presidential Election Update
After months of campaigning and speculation over the Mexican Presidential election, the results are in. Andrés Manuel López Obrador, commonly referred to as AMLO, became the new leader of Latin America’s second-largest economy after receiving 53 percent of the vote in a landslide victory. López Obrador’s victory as a left-leaning candidate brings uncertainty to the future of Mexico’s energy market deregulation, of which López Obrador has been an outspoken critic.
López Obrador made multiple commitments throughout the campaign process, though delivering on his promises may prove challenging in such a dynamic political, regulatory, and economic environment. In addition to López Obrador’s opposition of Mexico’s recent fuel market liberalization, corruption emerged as a top priority as he claimed his honesty and ethical nature would flow downward through all ranks of the Mexican government. Rampant violence was another focus, as deteriorating public security and prevalent impunity enabled homicide and crime rates in 2017 to reach record levels. Additionally, López Obrador aims to improve US-Mexico relations with US President Trump, specifically concerning border policies, immigration, and the North American Free Trade Agreement. Opposition and controversy between the two leaders was evident throughout the campaign process, though optimism surrounding future agreements shows promise that the two nations will aim for respectful and productive collaboration.
López Obrador and a Liberalized Market
López Obrador was an outspoken advocate for reversing the fuel market deregulation and liberalization that started in January of 2017. For decades, Mexico’s fuel landscape was monopolized by state-run Pemex. The government set national fuel prices that remained fixed for months at a time, eliminating any sort of volatility and competitive pricing from the marketplace. The intent of liberalization was to open the Mexican energy market to foreign investment, bolstering funding for domestic infrastructure and boosting the economy in the process.
Since liberalization’s completion in November, Mexico’s diesel prices have been primarily influenced through weekly adjustments of its IEPS tax (an excise tax), although prices have changed daily in response to other market factors such as transportation supply chain disruptions, geopolitical risk, and other economic variables influencing national prices. Mexico continues its reliance on the United States for the vast majority of its refined product imports, as inconsistency in refinery utilization and overall output has created supply uncertainty.However, López Obrador’s opposition towards energy liberalization was evident throughout his campaign. He proposed directing all investment into domestic refineries instead, allowing Mexico to gain more energy independence from US imports.
September 2016 marked the beginning of Mexico’s heavy dependence on US diesel imports, as US imports of diesel started exceeding Mexico’s production. Moreover, Mexico’s diesel supply chain contributes to regional price volatility, as diesel fuel is widely distributed on truck due to a lack of pipeline infrastructure.
Between December 2016 and January 2017, Mexico retail diesel prices increased 17 percent from $14.63 MXN/L to $17.05 MXN/L, exemplifying the price repercussions of Mexico’s decision to transition into a liberalized market. Retail diesel prices have spiked an additional 13 percent since, eclipsing $19.00 MXN/L for the first time on June 1, 2018. Global supply pressure, and geopolitical risk, coupled with Mexico’s internal fuel market price drivers, have been responsible for the increased prices. Mexico’s uncertain market leaves potential for continuation of the current trend in coming months. The graph below reveals the diesel import quantities from the United States, and the corresponding relationship with Mexican retail diesel prices. Though the two metrics are not entirely dependent on one another, both import quantities and prices have experienced substantial volatility in recent years.
The Future of the Mexican Energy Market
An extensive political process was needed to deregulate the Mexican energy market — going so far as amending the Mexican constitution to bring it to fruition. López Obrador’s pledge to reverse liberalization brings uncertainty to the longevity of these growing free-market conditions; however, as a constitutional change, the future state of Mexico’s energy reform is not in imminent danger. As it stands today, López Obrador does have coalition majority in Mexico’s Senate and Chamber of Deputies to possibly reverse the constitutional changes that initiated energy market deregulation in Mexico, should he choose to pursue it. López Obrador will quickly learn Mexico and most of Latin America will likely remain dependent on US exports for the foreseeable future, regardless of policy changes. The deregulation has also poured billions of dollars of investment into Mexico’s crude oil and refined products industry. Oil majors and multinational brands will certainly move to continue their investments and future opportunities in the Mexican market.
While it is fair to wonder what will happen to Mexican energy markets in the future, what is clear in the near-term is that managing energy in fluctuating marketplaces is essential to maintaining accuracy and consistency. This will remain true as the state of Mexican energy develops over time.
For more information about the changes occurring in Mexico or other energy management solutions, contact us!
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