Economics: Serious Fuel Price Policy Dilemmas
In recent weeks the price of oil has risen considerably in international markets. Some media commentators have advised that the oil rally will considerably bolster public finance in the next two years. They have also placed special emphasis on the idea that the extra infusion of funds could allow the president-elect to expand his government’s spending plans. However, the current state of Mexico’s oil industry suggests that such optimism is totally unwarranted.
With domestic oil output spiraling downward and the country becoming overwhelmingly dependent on imports to meet its need for refined petroleum products, especially gasoline and diesel, the petroleum trade surpluses Mexico was long accustomed to have been replaced by mushrooming deficits. The higher prices paid for the fuels the country runs on will make it even harder for the new government to make good on campaign promises of limiting any price hikes at the pump to inflation.
Mexico’s excise tax on gasoline serves as a mechanism for regulating what consumers are charged at the pump. When the cost of Mexico’s gasoline import purchases rises, the excise tax is lowered to mitigate the impact to consumers. So far the tax rate has tracked implicit-import and US East Coast prices as part of a strategy the combines meeting tax collection goals and mitigating the impact of the volatility (and seasonality) of imported gasoline prices.
But with crude prices expected to hug current highs in the coming year and generate additional government spending pressures, the next administration will have to choose between sacrificing tax collections and sticking with a central campaign promise to keep a lid on gasoline prices or follow the current administration’s policies including a politically toxic gasolinazo price hike.
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