Lower Gasoline in Mexico in 2016

Gasoline Prices: Too Low or Too High?

As of Jan. 1, 2016, the prices Mexicans pay for automotive fuels will vary month to month. However, in contrast with the monthly price hikes we got used to from 2006 to 2014, now domestic prices will be allowed to go up or down, in synchrony with international prices. The Peña Nieto government toutes lower fuel prices as a benefit of energy reform, but critics complain that fuels sold in Mexico are still overpriced.

Prices are relative. Are Mexico’s automotive fuel prices high or low? It depends. According to the Energy Information Agency, as of Jan. 4, a liter of regular in the U.S. Gulf Coast region cost $0.46, while in Mexico it cost $0.81, nearly double. Consider also that in Guatemala, which is not a major oil producer, a liter of regular sells for $0.70. Pemex imports over half the automotive fuels it sells in Mexico from Texas, so domestic consumers complain that fuels are overpriced. One might then be tempted to agree with the critics.

However, things look different if you consider the price of fuels relative to domestic incomes, proxied by Gross Domestic Product per capita (GDP pc). Say the average driver consumes 1000 liters of regular per year. In the U.S., which had a GDP pc of $54,000 in 2014, this amounts to less than 1% of the driver’s income. In Mexico, with a GDP pc of $10,300, it amounts to just under 8%. In Guatemala, with a GDP pc of $3,600, it amounts to almost 20% of a driver’s income. Now, who’s paying more? Perhaps a comparison with countries with similar GDP pc to Mexico’s might be enlightening. Let’s take Brazil, Malaysia and Turkey, for example. A liter of regular costs $0.92 in Brazil, $0.45 in Malaysia, and $1.47 in Turkey. Performing a similar calculation, drivers in these countries spend 8%, 4% and 14% of their incomes on fuels per year, respectively. Mexicans, then, fall roughly in the middle of the range. I say, let them complain.

The bottom line. The Peña Nieto administration’s insistence on energy reform delivering lower fuel prices is a half truth. Under current market conditions, a drop in prices may seem to vindicate it, but should the price of oil recovery, and fuel prices with it, the administration will be in a bind. Critics, on the other hand, have a point when referencing U.S. fuel prices, but they often fail to see that Mexicans do not necessarily pay more than drivers in other, more similar countries. It’s all relative.

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Source: ElDailyPost


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