Tuesday, June 24, 2008

Down Mexico Way

The WSJ reports that Californians are gassing up on more than beans in Mexico these days (sub req):

As gasoline prices rise ever higher, some drivers have discovered an alternative to runaway fuel inflation in the U.S.: subsidized gas just minutes away in Mexico.

Gasoline is selling for six pesos per liter across the border in Tijuana, which works out to about $2.50 a gallon, way cheaper than gas prices approaching $5 a gallon in San Diego County. Diesel fuel is cheaper still -- $2.19 a gallon.

All of this is a boon for James Blue's auto shop, located in a strip mall in the arid hills east of downtown San Diego. His business, Express Performance Center, installs extra-large fuel tanks in pickups and other work vehicles used for runs to fill up with cheap gas in Mexico.

Already this month, Mr. Blue's shop has installed 12 tanks, more than he sold in all of last year. He expects demand to grow throughout the summer. Bulk fuel users, including farmers and construction contractors, are his best customers, he says. Many drive to Mexico several times a week, often looking to bring enough fuel back to sell to neighbors and co-workers.

This is an interesting turnabout brought about by the rapid rise in gas prices in the US. It wasn't that long ago that people from Chihuahua (and other places in Mexico I imagine) would drive to the US to fill up on gas. For while the Mexican government may have sought to maintain parity in fuel prices between towns on both sides of the border, for many years in cities like Chihuahua the price per gallon was almost always higher than in the US.

I was surprised when I first heard about this disparity because Mexico is an oil exporting country. The problem is that its not a gasoline exporting country. In fact, most of the gasoline they use is refined in the US. And the oil and gas markets in Mexico are completely controlled by state run PeMex (Petróleos Mexicanos), which really had no incentive in the past to offer lower prices.

Now with oil prices surging, Pemex is struggling to keep gas prices in check to control inflation. The article states that the cost to subsidize lower prices was close to $2 billion in the first quarter of the year. So while in the US gas prices have followed the oil markets, in Mexico they have been kept low through this government subsidy.

In case anyone is seriously considering the proposal by some Democrats to nationalize the US oil and gas industry, they should take a good hard look south of the border. There is growing frustration among the Mexican people with the realization that despite record high oil prices, Pemex is failing to take advantage of the golden (black) opportunity. A colleague explained to me that a study had recently shown that Pemex has been operating with a 62% efficiency rating over the last twenty or so years. "Can you imagine what would happen in a private firm with such performance?," he exasperatedly asked.

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