Mexico energy reform has fundamentally changed its domestic oil industry, turning the country’s state-run oil monopoly into a dynamic, competitive marketplace.
This process began in 2014 with a hydrocarbons law laying out a path to transform the Mexican oil industry. With the goal of a fully liberalized market by January 1st, 2018, this bill specified dates when initial deregulation and later liberalization would occur throughout the process.
For the government regulated oil company Pemex, domestic production and output of oil declined substantially year over year in July by nearly 1/3. This decrease results in a loss of revenue—revenue that once went straight into the government’s pocket, funding as much as 30% of federal projects, specifically infrastructure. With the loss in revenue, Pemex is counting on international investment and competition to bring life back to the Mexican oil market and production back to its maximum capacity.
According to Mexico’s Federal Economic Competition Commission (COFECE), “The transition from a state-run oil company, among other effects, should transmit clear price signals, kick off new infrastructure development, spur modernization at Pemex and in general promote efficient market functioning.”
A deregulated, fully liberalized Mexican fuel market is just months away.
Understanding the implications reform has on regional fuel prices is key to creating consistency and stability in shipper’s supply chains.
So, what is the difference between deregulation and liberalization, and what is the impact of Mexico’s energy reform on shipping costs?
Deregulation of the Mexican fuel market signals the beginning of opening the domestic market to international investment and competition. Deregulation itself shifts control away from the state-owned and regulated firm Pemex and into a more diverse playing field. For the first time since the inception of Pemex in 1938, international companies are permitted to own infrastructure and fueling stations in Mexico as independently functioning market players.
During the process of market deregulation, the government of Mexico will continue to dictate national price changes in 90 distinct geographical regions until liberalization occurs—differing from a typical free market economy customary in the United States and other foreign economies. In these instances, changes in the global fuel market are directly reflected in prices seen at the pump, whereas in deregulated Mexico prices are not yet sensitive to these dynamics. A daily price maximum is set based on the government’s national fuel formula to minimize market volatility, insulating the Mexican fuel market from global fuel price and production changes. The goal of this maximum is to smooth out daily price movements in the marketplace to achieve a more gradual trend over time.
Deregulation occurred instantaneously on January 1st, 2017. Fuel prices went up overnight by 25 percent. As fuel rates increased, carriers demanded rate increases to haul freight. The problem lies in the calculation of rate increase requests—25 percent increases in fuel costs should not automatically equate to 25 percent increases in freight rates. That’s a 25 percent increase on both fuel and linehaul, resulting in shippers significantly overcompensating carriers for fuel consumption in Mexico.
In March 2017, a mere three months after the start of deregulation, the process of liberalization began—and will be fully implemented by December. While deregulation was the first major shift in Mexico’s energy reform, the central government still had predominant control over price volatility. With the introduction of liberalization, however, Mexico began its transition away from the government formula and into free market dynamics.
When a state liberalizes, the regions that fall within that state may no longer need to abide by daily government maximum prices, eventually becoming susceptible to global fuel market dynamics. This is dependent upon the status of Pemex’s share of infrastructure within each state, given that most of the states still abide by the government formula. Data continue to suggest stations within liberalized states closely track the government maximum prices.
As more states join the ranks of the liberalized—currently including Baja California, Sonora, and the remaining Mexican states that border the US—it is difficult to predict how competition in an increasingly diverse market space will drive fuel prices. Staying informed is the best way to stay ahead of the impact of Mexico’s energy reform on shipping costs.
Learn more about how Breakthrough®Fuel is helping clients navigate these changes in Mexico.