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December 16, 2013

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Great reporting!

Now I *definitely* know I need to have that shit umbrella ready. I think that ultimately, there are severe tax implications from the changes implied by these articles. Or a *much* less subsidized fuel system. From what I'm just incidentally gleaning from Mexico politics, this...is...gonna...blow. Plenty of parties doesn't really understand the implications, and when they do, lots of political fun is going to happen.

Well, here's the thing: Mexico phased out fuel subsidies back in the 1980s. As of December 4th, Magna blend gasoline retailed at $3.49 per gallon. For comparison, U.S. gasoline averaged $3.35 per gallon on December 2nd; regular went for $3.27.

Mexico prices: http://www.mexicomike.com/database/runner/public/mx_fuel_prices_list.php

U.S. prices: http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

There still could be fiscal implications, however.

Ah hah, Shah! I figured out where you're coming from.

Transitory Article 10 is really about electricity subsidies, not fuel subsidies. In September, electricity rates in Mexico averaged 11.2¢ per kWh; residential rates were only 8.2¢.

The overall rate in Mexico was not that different from the U.S. (10.3¢ per kWh), but residential electricity is costlier north of the border by more than four cents (12.5¢ per kWh).

Moreover, Mexico subsidies hot areas, so retail rates in Monterrey averaged only 5.4¢. Compare that with 11.3¢ in Texas and 12.2¢ in Arizona.

Article 10 could blow that system up, depending on how Congress interprets its mandate.

SOURCES

Mexican rates: http://sie.energia.gob.mx/bdiController.do?action=cuadro&cvecua=IIIBC02

2006 paper on Mexico's electricity sector: http://www.beg.utexas.edu/energyecon/documents/Guide_To_Electric_Power_in_Mexico.pdf

U.S. rates: http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a

It might refer to subsidies like http://banderasnews.com/0805/edat-mexgamble.htm , and when I google for more information, I see vague allusions like http://www.oecd.org/mexico/mexicocandomoretopromotesocially-inclusivegreengrowth.htm

The subsidies might happen at some other point in the economic chain, and not at the retail end. I wouldn't know how that works.

The really, really big thing, what I was really thinking about, was the nature of how Pemex adheres to the state. Googling suggests that 40% of revenues head into state coffers one way or another. The changeover to a sovereign oil fund, I believe, cannot happen as it has happened in Alaska or Norway, or even the stupid UK non-way. That's because you're adding new players who are funding the government, yanqui and otherwise. And the old ones have their deals unsettled, especially if there are any changes to transparency. How much would you wanna bet that certain currently entrenched elements will have their supporters out on the streets to preserve whatever sweet deal they've got, with much helpings of nationalist rhetoric? So the changeover will have lots of politics, and be much more unordered than simply PEMEX and a few competitors funding the state. That probably means changes in tax policies/subsidies/social spending--bigger than what is anticipated.

I really have to wonder whether Dutch Shell or TOTAL would touch these potential projects with a ten foot pole. I really think that there probably should have been more preparation of the public. Perhaps they wouldn't get a lot of LOLCats responses, but what you posted there is more far-reaching than expected. Makes me wonder if the TransPacificPartnership treaty negotiations were a model.

The first is an article from 2008, about a temporary pricing mismatch when crude prices spiked and Pemex did not pass it through. It wasn't policy. It's a weirdly-written article.

Gasoline was cheaper in Mexico than the U.S. for some time, because taxes on refined products were lower. That is a reasonable definition of subsidy, but you then have to say that the U.S. subsidizes gasoline and shows no sign of stopping.

For the OECD piece, open the attached spreadsheet. Note that energy taxes turned negative in 2006, when crude prices spiked and retail prices lagged. I have no idea how they calculate energy taxes, but the numbers clearly do not include the taxes imposed directly on Pemex's upstream operations.

Short version, to repeat: no fuel subsidies. Gasoline is now more expensive in Mexico than in the United States.

I’m a Mexican lawyer. I was referred to your blog by a former student of yours at the 2013 Global Energy Seminar (Merlin Cochran). I’m impressed by your grasp of the essentials of the reform and your “reading between lines”. Just wanted to share some comments:

1. Transitory articles of a constitutional reform are not deemed as the Constitution itself, but rather accessory provisions with a “shelf life” linked to its purposes. For instance, once the secondary legislation mandated by Article 4 is enacted, such Article ceases to exist.

That being said, Congress is not entitled to modify or repeal such Articles by means of ordinary legislation. On the contrary, Congress is bound by such type of provision. Many binding court precedents (jurisprudencia) have consistently confirmed that failure by Congress to comply with such articles is tantamount to contravening the Constitution itself. Here is one rather recently (2006) (http://www2.scjn.gob.mx/TesisAisladas/Paginas/DetalleTesis.aspx?IUS=1128)

2. Yes, as you correctly stated in a previous post: licenses are basically concessions. Affirming otherwise based on the minutia that the State will always remain the owner of the mineral while in the subsoil is ludicrous. However, in my opinion, this formalistic difference will suffice in a court of law.

3. When listing the upstream contracts that will be allowed (the four you mentioned plus any combination thereof), Article 4 says “among others”. This hints that it is possible for the Congress to create additional contractual arrangements (I’m not sure what to make of this, but my gut feeling is that it means troubles).

4. Article 4 actually grants Congress with 120 days after the coming into force of the reform to enact implementing secondary legislation. The reform comes into force the day immediately after its publication.

Looking forward to your future articles on the subject.

Dear Nacho,

Thank you! That clears up a lot: I did not understand the nature of transitory articles. Nor did I really believe that the language in Article 27 could be reconciled with the reality of the licenses.

Your comment is incredibly helpful and I'm much obliged.

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