AMLO’s impossible promise

“It is quite unlikely that López Obrador will be able to fulfill his commitment to contain gasoline increases below the rate of inflation.” Says an economist

MEXICO (Megamedia) – With public finances in increasingly precarious conditions, it will be practically impossible for López Obrador to fulfill what was – together with the fight against corruption – one of the stellar promises of his campaign and which gave him a final push to reach the presidency: lowering gasoline prices.

“It is not a question of commitment or will. Circumstances play against the president on this sensitive issue of such importance not only for the country’s economic policy but for all citizens”, says Alvaro Cano Escalante.

So relevant that the excessive increase in its price in 2017 – the “gasolinazos” – shot inflation up to 6.77%, the highest rate in almost 20 years. The social discontent was such that it is no exaggeration to say that it was one factor that contributed most to López Obrador’s resounding victory a year later.

The root of the problem
For several six years now, the economist continues, the federal government’s performance on this issue has been controversial, since it has led to the lack of competition in the sector. To date, Pemex continues to be, if not the only one, the leading supplier of fuel in the country, with more than 95% of the distribution.

This state monopoly has its “raison d’être.” Historically, the management of gasoline prices has served the federal government to give oxygen to public finances, he says.

In that context, during the electoral campaign, López Obrador made an excessive promise that he later had to qualify. Although there are videos on the Internet in which he promises to reduce fuel prices, upon reaching the presidency, he narrowed the scope of his promise: “I did not offer to lower prices… They will increase, but not more than inflation,” he said upon taking office.

“And it is in those terms that we have to understand what has happened from December 2018 to date with this essential product, whose price increase affects even those who do not buy it directly because they do not have a car, but who use public transportation and consume products that are transported by road and that increase in price with the rise in fuel prices. In short, gasoline is an essential product”.

In the economist’s opinion, it is fair to recognize that the president shows intentions of maintaining his commitment. However, he had not been able to respect it completely. Only now, after almost two years of his administration, it is being fulfilled with difficulty, “but not so much because of the presidential will, but because of the situation of the international oil market.

A complicated formula
Cano Escalante, professor of the Postgraduate and Research Unit of the Faculty of Economics of the University of Madrid, comments that the commercialization of gasoline in Mexico has certain particularities, some of which are predictable, even planned by the federal government, and others that are frankly difficult to anticipate. The final cost of commercialization, he says, is made up of four elements: the reference price, taxes, profit margin of gas stations, and logistics expenses.

Reference price. The first element is based on the quotation on the U.S. Gulf Coast. The amounts of gasoline in that region, where Mexico has its main oil trading point, are averaged and converted into Mexican pesos at the current exchange rate.

This “reference price” represents 40 to 45% of what gas stations charge, although it is a variable percentage: it decreases when prices fall in the U.S., but the opposite happens when they increase.

Some data on the gasoline sector in Mexico:
Average prices
As of September 5, Yucatan’s average gasoline prices are as follows: Magna, $19.16; Premium, $19.39, diesel, $20.65.

Gas stations in the country
There are currently more than 12,200 service stations in Mexico, of which 29% operate under 67 brands other than Pemex. There are about 3,500 gas stations of different brands, which does not mean free competition.

The Yucatan Times
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