Persistent struggles in Mexico’s energy industry have hindered President Andrés Manuel López Obrador’s objective of transitioning Mexico to a stage of self-sufficiency. These headwinds have been compounded by yet another challenge to the nation’s fuel market, as a recent acceleration of petroleum pipeline theft triggered a government decision to strategically shift product distribution from pipeline to tanker truck at the end of December 2018. The decision has sparked a delayed distribution chain throughout Mexico and, consequently, fuel shortages at approximately 1,000 service stations, with significant impacts in Guadalajara and Mexico City – Mexico’s largest municipalities. Additionally, the situation has led some to suggest President López Obrador fixed one problem with another.
The Impact of Delayed Distribution
Eastern Mexico is home to the majority of the country’s energy infrastructure, acting as a linchpin for the efficiency of Mexico’s refined product supply chain. While pipeline theft has historically posed risk from a supply perspective, the significant rise in import volumes from the US Gulf Coast has since facilitated more prevalent theft, particularly from Mexico’s pipeline network in the eastern coastal states where much of the nation’s storage capacity resides.
The direct output from Mexico’s six refineries has also been tampered with, causing an indefinite closure of pipelines connected to these production facilities. To put the magnitude of the nation’s pipeline theft into quantitative terms, illegal pipeline perforations in 2018 were estimated to exceed 15,000, costing state-owned Pemex approximately 60 billion pesos (~3 billion USD) in lost revenue and exacerbating the already tight supply in a nation with just 2 to 3 days of available product inventory. The relatively confined radius of Mexico’s most valuable infrastructure elevates the enormity of disruptions in states bordering the Gulf of Mexico, and often causes a ripple effect across Mexico’s land mass.
The map above highlights the states with reported shortages as a result of delayed distribution, with the darker regions of western and central Mexico feeling the brunt of the impact – both from a supply and price perspective. The breadth of the problem not only uncovers the importance of Mexico constructing additional infrastructure to satisfy domestic demand, improve the current state of its petroleum supply chain, and transition to a truly free market, but also highlights the nation’s over-reliance on Pemex. Their ownership of nearly all of Mexico’s energy infrastructure makes it difficult for private companies to lend a helping hand during times of comparable severity, though the nation’s thirst for investment and dire need for infrastructure expansion and brand diversity will look to attract private companies to the Mexican fuel scene in the years to come.
Fuel Issues in Mexico and their Effect on Diesel
Headlines suggest the issue is rooted in supply and focuses primarily on gasoline, with the impact on consumer passenger vehicles causing a nationwide uproar for citizens in need of transportation fuel. Yet, the true problem revolves around distribution capacity and the delays associated with longer lead times of deliveries via truck – ultimately impacting all refined products, including diesel. As evidence, recent reports featuring commentary on Mexico’s refined product inventories reveal approximately 12 million barrels of gasoline, diesel, and jet full currently sit dormant in anchored vessels within eastern ports and storage tanks awaiting unload. Resultingly, the gradual process of transferring product from vessel, to storage, to tanker truck, and finally to service stations has sparked notable delays in order fulfillment, with product demand essentially everywhere but limited means of transport.
From a diesel cost perspective, station-level prices have varied by state, though noticeable deviations from the national average have emerged in the impacted states from the map above. Guadalajara, Jalisco, the State of Mexico, Michoacán, and Zacatecas, however, have shown the most significant price impacts – as shown in the chart below – which measures daily price change from the beginning of the pipeline shutdown on December 18. The lower price environment in Mexico’s retail landscape at the end of 2018 has continued on a national basis through 2019 to date, yet the states listed above have shown some relatively abnormal price behavior in the upward direction – which became especially noticeable in the past two weeks.
Beginning January 1 – when retail prices began to show price implications from the supply issue – diesel prices in these states rose approximately 0.3 percent on average, while the national average diesel price decreased by 0.1 percent. While this difference is rather marginal, it still provides evidence that recent price behavior is attributed to the delayed fuel distribution in western and central states. Moreover, the overarching theme of Mexico’s state-level diesel prices is such that prices typically move in tandem with the national average, providing further evidence that current price trends are connected to the recent disruptions in Mexico’s refined product supply chain and the heightened transportation costs associated with tanker distribution. Carriers, too, have fallen victim to the recent problems, albeit much of the impacts have been felt by small and medium-size carriers that don’t have access to on-site fueling stations at their operating centers like some of Mexico’s larger carrier base. The steady nature of freight transport and fueling with diesel means these supply shocks are much less prevalent than those experienced by gasoline consumers, thus creating a less drastic price spike.
President López Obrador remains adamant in his strategy to mute the impacts of petroleum pipeline theft, though recent developments pose risk of supply issues continuing longer-term if the government and Pemex executives continue under current operations. To that end, certain pipelines have slowly re-opened in recent days, suggesting supply levels and distribution delays could incrementally improve in the weeks to come, yet this largely depends on the sustainability of the President’s current strategy. The delayed nature of retail prices in Mexico, too, could equate to upward diesel price pressure in the near-term, though the exact impact remains to be seen.
This instance is just one example of the complexity that exists in Mexico’s fuel market and reinforces the value of transparency in a complex energy environment. For questions surrounding recent developments in Mexico’s energy landscape, or to learn more about our Mexico Fuel Management service offering, contact us!