Home > Automotive > Expert Contributor

Automotive Fuels: Giving Coherence to Public Policies

By Fluvio Ruiz Alarcon - Senado de la Republica


By Fluvio Ruiz Alarcón | Adviser - Thu, 03/09/2023 - 15:00

share it

Before the 2018 electoral campaign, although with much more clarity and determination as a result of that election, security (self-sufficiency, even) in the national supply of automotive fuels and the fight against poverty were  two of the fundamental axes of the political orientation of the movement headed by the current president of the republic. Once this movement became the new "hegemonic bloc," along with these demands, and because they have been formulated as a nation state, are the commitments signed by Mexico in the framework of the fight against climate change and in favor of the energy transition.

In the case of automotive fuels (gasoline and diesel ), since the 1990s, their production has  not kept up with the growth rate of their national consumption. In fact, in 1992, the Azcapotzalco refinery was closed as an indirect consequence of the explosion that occurred in April of that year in Guadalajara. Furthermore, as a result of the so-called “December error,” the budgetary difficulties that arose from it and the very orientation of the economic policy of the government of Ernesto Zedillo,  the production of gasoline at the end of the last century fell by 8.2%, going from 446,400 barrels per day (Mbd) in 1995 to 409,900 Mbd in 2000; while its import increased by 30.5% in the same period.

In the period 2000-2017, the national deficit between oil production and consumption deepened: consumption grew at a rate of 1.3% per year and production fell at a rate of 2.8%. As a result, Mexico's oil trade balance turned negative. Crude oil exports were no longer enough to cover imports of derivative products. In 2018, PEMEX spent US$32.6 billion to import refined products. Thus,  there was a negative oil trade balance of US$3.3 billion.

The described evolution of the production, consumption and supply of automotive fuels led to the fact that, once he assumed the presidency c, Andrés Manuel López Obrador reaffirmed his desire to rehabilitate the national refining system and expand it with a new refinery. Subsequently, the acquisition of a little more than 50% of the Deer Park refinery in Texas would be decided.

To date, only the already programmed cost of the new refinery has been estimated at at least US$18 billion. Hence, it has attracted a lot of attention, given the extraordinary budgetary effort for the construction of a new refinery, the rehabilitation and reconfiguration of existing facilities as well as the acquisition of "the other half of Deer Park."  The response to the increase in the international reference prices of automotive fuels has been the same as that by all governments since then President Luis Echeverría decided to unfreeze gasoline prices, that is, to subsidize in one way or another its price to the final consumer.

In the case of the current government, not only has the IEPS payment been subsidized by up to 100%, but discounts have also been made on VAT and ISR. The result was that in 2022, according to the data reported by the Ministry of Finance at the end of last January, the amount of the subsidies totaled MX$396.6 billion. This figure was made up of about MX$288.6 billion that was not collected for the IEPS and about MX$108 billion as a result of VAT and ISR refunds.

The resulting fiscal gap is equivalent to the final estimated cost of the Dos Bocas refinery (US$20 billion) and higher than the MX$394.5 billion calculated by the Ministry of Finance  itself, as oil surpluses for last year. To the amount of the 2022 subsidies, the fiscal sacrifice of more than MX$104 billion made by the state in 2021 to control the prices of gasoline and diesel should be added. That is, more than half a trillion pesos (US$25 billion) has been used in two years to regulate the prices of automotive fuels.

The central argument in defense of automobile subsidies lies in their expected usefulness as an instrument to contain inflation, which hits the poorest sectors of the country more severely. This argument may be valid in the case of diesel, a fuel used for the public transport of people and cargo. However, nothing seems to justify subsidizing gasoline for private vehicles. The Ministry of Finance itself has recognized the regressive nature of subsidies for automotive fuels in this case. More than protecting the poorest (inflation on food products in 2022 was higher than general inflation and that of fuel), this costly measure for public finances actually seems intended to avoid phenomena such as the reaction of the middle classes to the “gasolinazo” of 2017, with all the political costs that this entails.

Another argument that is used to defend the subsidies is of an accounting nature: stock from oil surpluses are used to cover the subsidies. This was true in 2021, when the surpluses were greater than the subsidies, but, as we have already seen, it was not true in 2022, when the relationship was reversed. In addition, from a conceptual perspective, the partial transfer of oil income, which belongs to all Mexicans because it is generated from a resource owned by the nation, in favor of a privileged group, such as motorists, is highly questionable. 

In short, the way in which the government has used its fiscal instruments to face the increase in automotive fuel prices is not consistent with its investment efforts in refining, nor with its central objective of combating poverty and inequality. Not to mention our country's commitments in the fight against climate change, which could be favored by somewhat inhibiting gasoline consumption as a result of appropriate taxation.

It is clear that it is imperative as a country to define the socially optimal level of fuel taxation to achieve, without sacrificing the consolidation of a true welfare state, an efficient operation of the production, storage and distribution system as a whole, in addition to helping finance the energy transition, environmental protection and the development of public transport.

It is necessary to give coherence to the set of public policies that affect the dynamics of the national gasoline and diesel market so that they do not limit the achievement of other fundamental objectives of the Mexican state.

Photo by:   Fluvio Ruiz Alarcon

You May Like

Most popular