AMLO Approaches Oil Supply Shortage With Fuel Subsidy
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AMLO Approaches Oil Supply Shortage With Fuel Subsidy

Photo by:   Dawn McDonald, Unsplash
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By Kristelle Gutiérrez | Junior Journalist & Industry Analyst - Tue, 03/15/2022 - 17:42

President Andrés Manuel López Obrador reassured the public that Mexican gasoline prices will not be affected by the shortage in oil supply caused by the blockade on Russian crude supply by the US and the UK. By using the currently elevated oil prices as a buffer, the government says it can establish a subsidy.

The president stated on March 8 that even though the Mexican export basket's crude oil costs have increased rapidly from US$71/b to US$115/b, there will not be an increase in gasoline prices. Instead, the government will handle the deficit through a new subsidy enabled by the elimination of the special tax on production and services (IEPS). This measure, funded by Mexico’s own profits from these higher prices, will likely continue until the market stabilizes. According to López Obrador, the issue should not concern Mexicans as the country’s trade balance will remain stable and the net impact of the measure will turn out positive. “That is why we do not need to raise fuel prices since these subsidies consist of PEMEX’s excess oil revenue. We did the balance and it has a net positive result," said the president.

This measure, however, could have severe repercussions on Mexico’s finances. Hector Magaña, Professor and Researcher, Tec de Monterrey, expressed his reservations regarding the subsidy, as it could lead to a budgetary reduction for public programs and a reorganization of Mexico’s public expenses plan. “It would be exceedingly complicated to continue with the subsidy in our country,” he told CONECTA. Magaña added that the currently ballooning inflation is party caused precisely because of these rising fuel prices, so the government is keen to maintain its subsidy.

The Bank of America Securities (BofA Securities) has also expressed its skepticism regarding the long-term viability of the subsidy. BofA expects the net impact will more likely be near to zero, only if international prices do not rise significantly further. Otherwise, the net impact could even turn out slightly negative, as the president announced that the government would spend "1 percent of the GPD to avoid collecting the IEPS and another 1 percent on a new fiscal stimulus [to benefit] gasoline sellers," added BofA, according to Forbes.

This course of action matches the president's desire to achieve energy sovereignty and self-sufficiency during his administration. According to El País, PEMEX’s astronomical debt, standing at US$113 billion as of December 2021, partly led to a strategy to begin the reactivation of the national refinery system to decrease crude exports and allow Mexico to become self-sufficient instead. Initially, AMLO indicated that the goal for 2022 would be to double its refining capacity and bring down exports to 435Mb/d.

Ultimately, experts agree that until the conflict between Russia and Ukraine is finished, Mexicans will have to rely on the subsidy and face the due consequences afterward.

Photo by:   Dawn McDonald, Unsplash

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