Freezing Mexican fuel prices a long, costly road

Implementing Mexican president-elect Andres Manuel Lopez Obrador's promise to freeze fuel prices on 1 December would require following a legally and economically challenging road, analysts say.

AMLO, as Lopez Obrador is widely known, declared repeatedly during the campaign that gasoline, diesel, natural gas and electricity "prices will be frozen" for three years and will not rise beyond the rate of inflation in Mexico, which was 4.5pc in May.

The three-year limit aligns with the government's plan to build a new refinery during that time, which it says would contribute to lower domestic fuel prices.

Carlos Urzua, a possible candidate for the new administration's finance minister, said the best time to freeze fuel prices is now. But fulfilling that promise might be costly and politically challenging, even with AMLO enjoying a majority in the Mexican congress, according to Miriam Grunstein, an independent energy lawyer with Brilliant Energy Consulting.

"The law says that fuel prices right now are subject to market forces, so to freeze them they will have to change the Income Law," Grunstein said, referring to the laws governing government tax revenues. "Neither the energy minister nor the finance minister are allowed to control the price, although nothing is said about the taxes."

The Hydrocarbons Law passed as part of the country's landmark energy reform states in its 14th transient article that "all fuel products' prices will be determined based upon market conditions from 1 January 2018."

Getting lawmakers to agree to changing the laws, even with a majority in congress, will be a challenge because abrupt, unilateral changes are unwelcome by voters.

"They would still need a lobbying effort in both houses to convince other parties to support the idea of frozen fuel prices," Grunstein said. "The times when a party decided any action unilaterally are over, and I do not think Morena [AMLO's party] wants to start off on the left foot."

Benjamin Torres-Barron, a partner in the Mexico office of law firm Baker McKenzie, said the government might instead opt for a known route: modifying the excise tax (IEPS) as needed to maintain prices. The current government uses this fiscal technique to avoid abrupt price changes, but not to keep them at the same level for long periods.

"They could go the other way and change the law, but the easier route is through the IEPS," Torres-Barron said.

That route is not without financial risk, though. IEPS, the main fuels tax, would drop as an important source of government revenue if it becomes the mechanism to subsidize fuel prices.

Also, keeping prices frozen through IEPS implies a bureaucratically and mathematically complex route as there are several embedded variables, said Fernando Gonzalez, vice president for Mexico's fuel retailers association (Onexpo).

"You have to pay attention to the international oil price, to the proper international reference of gasoline prices," Gonzalez said. "It seems like a pretty adventurous road to follow."

He said Lopez Obrador's team has not presented a formal fuel prices plan despite retailers' efforts to discuss the issue with the incoming administration.

The economic and financial costs of that scenario are also too high, analysts warned.

In a recent study Barclay's Capital said that keeping fuel prices at the same level would reduce Mexico's gross domestic product (GDP) by 2pc. Mexico's GDP in 2017 was about $1.124 trillion, according to the International Monetary Fund.