Mexico’s innovation springs from desperation

Author Carla Bass, Deputy News Editor

A gasoline and diesel shortage induced by the government’s campaign against rampant and costly fuel theft tests the creativity and mettle of investors and drivers.

Fuel retailing creativity is in full bloom in central Mexico where gasoline and diesel supply has withered in recent weeks. Some station owners alert motorists by phone when a pipa truck will arrive with fresh supply to save them waiting for hours in line. Online maps show which stations are still doling out supplies. And drivers have taken to chat groups and apps to hunt for their next tank of gasoline. Yet these are not the innovations imagined when Mexico cracked open its hermetic energy market to outside competition.

The shortages emerged with populist President Andres Manuel Lopez Obrador’s similarly creative, if blunt, tactics to fight rampant fuel theft that cost Mexico $3.3bn last year. Since taking office in December, Lopez Obrador has militarized fuel installations and switched distribution of gasoline and diesel from theft-prone pipelines to much slower and costly tank trucks. Mexico’s customs agency will be open around the clock to speed in fuel imports, at least once they clear US customs. The campaign demonstrates the uncertainty and central control – or decisive action, depending on the perspective – for which investors should be prepared during the six years of AMLO’s term. Yet Mexico’s fundamental need for imported fuels will be certain for years to come.

Mexico had extended the promise of more investor certainty with its groundbreaking energy reform in 2014 that dismantled Pemex’s monopoly and aimed to reverse the country’s declining production of oil, natural gas and refined products. Implementation in the fuel sector took hold in 2017, as price subsidies ended on retail gasoline, diesel and LPG and new retail brands – including ExxonMobil and BP – lit up Mexico’s highways. Drivers could begin to count more on full liters of gasoline – skimming at the pump is a common complaint — and comforts such as better restrooms and even luxuries such as gourmet coffee and wifi.

But retail prices also rose – both because of the reform and international price fluctuations. AMLO was voted in on this wave of discontent and his vow to change what he called a failed energy reform for not delivering more savings and efficiency for consumers. Higher prices have also provided more incentive for fuel theft, attributed to both organized criminal groups and Pemex – both in coercion or in collusion.

Yet AMLO had offered some sputtering reassurances to investors, such as keeping the basic new market-driven structure – while also promising fuel prices will not balloon above inflation this year. And while the fuel shortage is a clear disruption to business, the president called on more help from the private sector to clear the clogged supply lines with more trucks and to import more fuels independently of Pemex.

The government also quickly denied that it cut off imports of refined products from the US – despite AMLO’s promise to wean Mexico off this 1mn b/d dependence in the long term through more refinery investment. Mexico’s own numbers plus recent market conditions in the US Gulf coast back up this assertion, although a prolonged shortage would create some demand destruction.

How long the squeeze will continue is unclear. AMLO has vowed to close illegal tap-hit pipelines as often and as long as needed, saying that he will outwait the thieves, or huachicoleros. Retail fuel prices have started to tentatively creep upward, although less than expected in a liberalized market, even with retailers trying to avoid accusations of gouging. Forecasts already show this and other recent decisions shaving points off Mexico’s initial forecasts of 2pc growth in GPD this year.

For drivers simply waiting for a fill-up, the forced creativity may grow old soon.

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