Gabriel Quadri de la Torre
Managing Partner
Enerclima
/
Insight

Rethinking Subsidies and Downstream Regulation

Wed, 01/22/2014 - 10:26

Gabriel Quadri de la Torre, Managing Partner of Enerclima, believes that private parties should seize the opportunity to invest in Mexico’s downstream market. “The private sector will have plenty of opportunities that will positively impact national development. Private parties could invest in refineries, as I do not see why the state should invest in such projects, putting the nation’s monetary resources at risk in uncertain businesses.” Quadri de la Torre strongly believes the government should not be in charge of producing goods such as oil and gas, claiming this is the role of the free market. He believes that the state should regulate such operations, as many externalities and matters of public concern, including climate change, ecosystem preservation, and air quality, come from the hydrocarbon chain.

One of the benefits of strengthening the refining sector with private investment would be eliminating the cost of exporting crude oil and importing refined product. Héctor Moreira, Professional Board Member of PEMEX, says refineries are not really profitable for oil companies, especially when compared against investing in exploration and production. If the refining sector would operate as an open market, subsidies should be revised. Mexican scholar Miriam Grunstein warns that price controls are going to have to be removed as nobody is going to refine in the country only to sell their gasoline at a controlled and subsidized price. Regarding subsidies, she recommends that these should follow the lines of distributive justice; for example, funds should be invested in social programs, public health and education, and infrastructure: “This should be done with transparency and equality to ensure that, unlike today, gasoline subsidies truly go to helping those sections of society that need support.”

In a similar vein, Quadri de la Torre believes that oil revenues should be invested in developing alternative energy sources and mitigating environmental impact. He says the current institutional climate will allow for the progressive desertion of unnecessary subsidies. “If there is private investment and competition in the commercialization of end products such as gasoline, then Mexicans will get used to it being a commodity that can be sold internationally to a global market.” He adds that a fluctuating, market-based price on gasoline and efficient fiscal mechanisms like the carbon tax will make the country more energy efficient and will help reduce greenhouse gas emissions.