Update: Mexico Wakes Up to New Year, New Gas Prices

Mexicans woke up with a headache on January 1, but less because of New Year’s hangovers and more because they were feeling the pinch of price hikes on everything from produce to transportation. The culprit? A gasolinazo—gas price increases that could get as high as 20 percent this month while the country starts the process of dismantling longstanding fuel subsidies. Gas prices will fluctuate for the first time since 1992, when the government began setting them as a measure to protect against inflation. Here are key points about the rise in Mexico’s fuel prices.

The price deregulation occurs as Mexico continues opening up its energy sector.

Changes to gas subsidies accompany the ongoing rollout of Mexico’s 2013 energy reform, which won approval early in the administration of President Enrique Peña Nieto and ended more than seven decades of a state petroleum monopoly by opening up to private investment. (The same is true for the electricity sector, which will also see price increases this year.) The reform was controversial domestically, given that Mexicans see the oil industry as part of the national patrimony ever since its 1938 expropriation.

But state firm Pemex has been suffering from production declines and infrastructure issues for years, and proponents say the reform will help solve some of its competitiveness woes. Per the Mexican Institute for Competitiveness (IMCO), the branch of Pemex charged with refining gasoline lost $31.6 billion between 2010 and 2015. Mexico may be the world’s twelfth-biggest oil producer, but it imports about half of what it consumes. In 2015, the oil sector accounted for 6 percent of Mexico’s export revenues—a steep drop from 30 percent in 2009.

In 2017, new competition will manifest itself in concrete ways—and on the streets—as Pemex will no longer be the only company with gas stations in Mexico. At least six companies will start operations this year.

Price liberalization will occur over the course of 2017.

Mexico initiated the process on the first of the year, but liberalization will take place gradually in 2017. On January 1, the Mexican government set initial increases that will remain in place until February 3, when prices will be set weekly until February 18, at which point they will be set daily. On March 30, prices will start to fluctuate according to market rates rather than government price-setting in the northern states of Baja California and Sonora as part of a five-stage rollout across the country that concludes with the Yucatán Peninsula on December 3. 

Geography will also play a role; the country will be divided into 90 regions, with maximum prices in each one set according to gas transportation, distribution costs, as well as proximity to the U.S. border, given that gas will be cheaper in Texas.

The government says the price hikes prevent public spending cuts.

In the days leading up to the new year, Mexican Finance Secretary José Antonio Meade said price deregulation will mean Mexico will no longer keep fuel prices artificially low, thereby helping avoid spending cuts in areas such as health and education. Meade stated that the increase has to do with the international price of gasoline rather than the energy reform and that transportation prices should not go up (although transit authorities in the capital disagree).

The Secretariat has also emphasized that the subsidies disproportionately benefit some Mexicans, given that 30 percent of households consume roughly 70 percent of gasoline in Mexico.

The price increases could have political costs.

Despite pledges of benefits, many Mexicans remain unconvinced as they feel the financial impact. Between the gasolinazo, Pemex supply woes, and fuel theft by organized crime groups, they faced shortages at the gas pump over the December holidays, as well as protests across the country since the hike went into effect. The year started with more bad news as Ford announced cancelation of a $1.6 billion plant in Mexico after facing criticism from incoming U.S. President Donald Trump. On top of that, inflation is expected to run above 4 percent and some firms suggest Mexico’s economic growth will slow to its lowest rate since the height of the financial crisis. 

As the year gets off to a difficult start for Mexico, many observers say the gasolinazo will have a political cost for Peña Nieto’s Institutional Revolutionary Party (PRI) by tainting his much-touted energy reform just as the country gears up for the 2018 presidential election. Juan E. Pardinas, head of IMCO, described Peña Nieto’s repeated promises that the reform would not lead to fuel increases as “the worst political and strategic error” of his term.

Others see populist Andrés Manuel López Obrador—an ex-mayor of Mexico City and two-time presidential candidate who will likely run again—as a beneficiary of the outcry over the gas-price increases, as well as of a new period of anti-establishment leaders like Trump. A poll leader and long-time critic of the energy reform, López Obrador began warning his followers about the gasolinazo months ago.