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Tuesday, October 25, 2011

PEMEX – The Mexican Horn of Abundance


Aura Catalina - BGLC staff writer
The Pemex gas stations throughout Mexico are regarded as inexhaustible sources of cheap fuel. Some might say “don’t look a gift horse in the mouth”, but you have to wonder: Why is Mexican fuel cheaper than American fuel? Is the supply of Mexican fuel as inexhaustible as it seems? And, most importantly, how long is this going to last?

Historical facts
Pemex or Petróleos Mexicanos is a state-owned petroleum company with a total asset worth of over $400 billion, which makes it the second largest in Latin America. Pemex emerged from the conflict between nationalist Mexican president Lázaro Cárdenas and foreign companies, which exploited Mexican oil during the 30s.

The president nationalized all the resources and facilities of American and Anglo-Dutch companies. The immediate result of this bold action was that many states refused to purchase Mexican oil. In spite of this, Pemex has become a significant oil producer and turned Mexico into one of the largest oil exporters in the world.

Since the 40s, Pemex has successfully supplied the domestic demand for fuel. The ability of the state to keep prices at a low level has attracted the slightly envious attention of neighboring countries.

A closer look
Cheap oil is such a rare commodity because it goes against a basic commercial objective: profit maximization. However, in the case of a national oil company, political objectives get the upper hand. As a result, national oil companies, Pemex included, distinguish themselves by excessive employment, lack of investment, poor use of resources, and last, but not least, subsidized prices.

This constant struggle to meet political requirements turned Pemex into a rather inefficient company, which has incurred an enormous debt over the years. While the national demand has increased, the production of Pemex has declined. To make matters worse, Pemex is seen as a source of income by the government and a large part of the revenue goes to the national budget. Investment has been directed towards the existing fields, and hardly any exploration for new fields has been made, which means that the oil reserve is constantly declining. This bleak picture is made worse by a rather poor safety record with several accidents that caused many losses in both assets and lives.

Buying fuel from Mexico
Though the price for fuel has increased slightly in the last three years, the increase does not affect the American customer too much. This happens because the dollar peso exchange rate has altered also, with the American dollar increasing in value. Any change in the price for Magna, Premium, and Diesel is always announced in advance by Pemex.

Since the prices in US are higher, many Americans drive to the closest Mexican city to buy fuel at a cheaper price. For the Mexican authorities, this means that Americans would benefit from subsidized prices at the expense of the Mexican taxpayer. As a result, the government has decided to put a higher price for fuel in tourist areas, especially in the towns that are closer to US.

Here are the most recent prices established by Pemex for Magna (regular unleaded), Premium, and Diesel at the time of writing (Oct 19, 2011)



Prices in Baja
Prices in California
Pesos per Liter
Dollars per Gallon
Dollars per Gallon
Magna
9.56
2.64
3.96
Premium
10.50
2.91
4.15
Diesel
9.92
2.75
4.32


Exchange Rate: 1 Mexican peso = 0.074 U.S. dollars
Conversion rate: 1 U.S. Gallon= 3.78 liters

Is it really so convenient to purchase fuel from Mexico rather than from US? The obvious answer is that it depends on the type of vehicle. If someone with a standard car buys 15 gallons of regular unleaded fuel from California, the average price will be around $60. If the 15 gallons are purchased from a Mexican town located near the border, there will be a saving of around $20. It is up to each person to decide whether this saving is worth the effort of crossing the border. It is not advisable to purchase fuel by jerry can, because some gas stations refuse to sale anything to these customers. Those who have a recreational vehicle will make a better bargain because it carries around 75 gallons of diesel. The $120 saving will certainly make any vacation better.

Buying fuel from Mexico can get a bit tricky, mainly because of the pesos/dollar and liter/gallon conversions. The best approach is to pay directly in pesos, just to make sure that the change received is correct. Additionally, the quantity, which is given for one gallon, might differ from station to station. However, customers who feel they are being given an incorrect quantity can call PROFECO, the Mexican consumer protection service (800-468-8722 - toll free).

What the future might bring
Today, the need to reform Pemex is as pressing as ever. Several suggestions have been put forward by the president and his advisors. The government should improve its ability to collect taxes, so that the budget stops being so dependent on Pemex income. Another option involves a law that would make it possible to publicly trade 49% of Pemex. During the effort to make Pemex profitable, keeping prices low will probably be pushed down the list of priorities.

In order to address the issue of dwindling oil reserves, the government announced that they will start exploration of a new site in the Gulf of Mexico. This area supposedly contains up to 50 billion barrels of oil, probably one of the biggest underwater oil reserves that have not been exploited so far. Exploration is hampered by lack of funds, technology, and specialized skill. In addition, the Gulf of Mexico is extremely deep, and the weather is notoriously unpredictable.  

With the Calderon presidency ending, it is likely that the tough issue of Pemex reform will be left for the next administration. Since the elections are so close, nobody is truly motivated to discuss the Pemex problem. Under current circumstances, Pemex will be unable to sustain its “horn of abundance” attribute and continue giving away large quantities of fuel at a small price. It is up to the Mexican authorities to make sure that the oil company will not become a black hole of debt.   



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