Pemex Cash Injection Vanishes Into Mexican Drivers’ Pockets

  • Government put $1.4 billion into Pemex back in April
  • Below-market fuel prices cost Pemex 29 billion pesos

Mexico’s government gives money to Pemex with one hand and takes it away with the other.

The country’s finance ministry, which gave Petroleos Mexicanos a 26.5 billion peso ($1.4 billion) capital boost this year amid the state-owned company’s worst financial crunch, has cost the oil giant all of that and more this year by forcing it to sell gasoline and diesel below international prices, according to data compiled by Bloomberg. The loss over the past 4 months: 29 billion pesos.

While this helps Mexican drivers, it deepens the hole Pemex is in, with debt nearing $100 billion and an 11-year drop in crude production. In a nod to global investors, the Finance Ministry said in April it would work with Pemex to "define the most adequate mechanisms to support the company and strengthen its financial situation."

"The price offered to the public is a price that has to be very noticeably higher than the spot price of those products," Adrian Lajous, Pemex’s chief executive officer from 1994 through 1999, said by phone from Mexico City. "It is difficult to understand how the price of the formula of the finance ministry could be a price below” the international average cost, he said.

Though selling fuel below international market prices is not a new practice in Mexico, regulatory changes made earlier this year transferred the loss to Pemex instead of the government, which had previously absorbed the implicit subsidy.

The Finance Ministry said in an e-mailed statement that Mexico’s formula for setting fuel prices reduces volatility for consumers while tracking the international benchmark in a method that will offset any discrepancies over time. In the winter, fuel prices will probably fall again, allowing Pemex to increase revenue, the Ministry said. 

Below Market

"Regarding the pricing of gasoline, the price at the pump is higher than the international price," Jorge Martinez, Pemex’s Interim Director of Industrial Transformation, said without elaborating on the company’s conference call today when asked about the price discrepancy between Mexican and international gasoline prices. Pemex reported Thursday an 83.5 billion peso loss during the second quarter, citing on the call exchange rate losses, slumping production and lower oil prices.

Mexico uses an average of 198 million liters (1.24 million barrels) of fuel a day, government data show, more than half of which is imported. The difference between gasoline and diesel prices in the U.S. Gulf Coast spot market and the amount charged in Mexico -- which is determined by a formula published in the country’s official gazette -- adds up to as much as 429 million pesos ($22.8 million) in a day. Pemex declined to comment.

The ministry’s decision to keep domestic fuel prices at a discount is likely an effort to placate Mexican consumers, who were promised cheaper energy prices by President Enrique Pena Nieto’s administration as a result of the country’s landmark energy overhaul passed in 2013, said Carlos Bravo, political analyst at the Center for Research and Teaching. If local fuel prices increased to match the international market, the resulting rise in consumer costs would likely weaken the popularity of the ruling Institutional Revolutionary Party, or PRI, in the run-up to the 2018 presidential elections, he said.

"The political cost of greater gasoline price increases would be reflected on the state elections of next year and the presidential elections of 2018. It would be catastrophic for the PRI party," Bravo said in a phone interview from Mexico City. "There’s been several decisions in this administration that seem to be more inclined to punish Pemex than help."

Fuel Formula

While deciding the values that will set fuel prices for the following month, the periods of U.S. fuel prices that are used for reference are picked by the finance ministry. In March it used four weeks of January and February prices to set an average cost, while in July it chose 13 weeks from February through May.

The ministry announced last month that the cost of premium gasoline per liter would increase 2.4 percent in July, while unleaded gasoline would increase 1.8 percent for the month, though the increase wasn’t enough to cover the fuel rally of recent months. An additional fuel price increase of 3 percent for unleaded gasoline was announced Thursday, according to an e-mailed statement from the ministry.

Pemex’s dollar bonds have returned 7.9 percent since the government’s April 13 announcement to inject $1.4 billion cash into the state-owned company’s budget, compared with a 6 percent advance for emerging market corporate debt and a 6.7 percent gain for Mexican companies.

"There’s a point when Pemex won’t be able to absorb" these costs, Bravo said. "They’re killing the goose that laid the golden eggs."

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