The Government of Mexico Has Oil on Its Hands - It Had To Do It 1

On a slippery slope

The double digit gasoline price hike effected on New Year’s Day was a rude awakening for Mexico. But what reasons drove the government to take this knowingly volatile decision?

The first reason is related to ending the subsidy regime on gasoline. Subsidies are tricky. On one end, they have proven to help support a range of financially stressed populations in developing nations. However, they are also known to be taken for granted. Rather than being considered a form of monetary support to ease budgets for a short time, they are taken to be rights for all posterity regardless of the economic development and evolution of the nation in question.

Subsidies put pressure on government finances as it then needs to absorb the difference between the market price of a commodity and the price set for consumers. Hence, in order to begin to mend the government’s finances, it was important for Mexico to end subsidies on fuel.

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In defense of this move, President Enrique Peña Nieto said that if this hike would not have been effected, then the government would alternatively have to cut down spending on social programs. Between the two, the government decided to free gasoline prices which are now market determined.

Privatization and economic competitiveness

Another reason why the government chose to end subsidies on gasoline was to improve the competitiveness of the Mexican economy. Mexico has begun to allow private companies to import gasoline and open fuel stations. This arena was the exclusive playground of government owned Petróleos Mexicanos, or Pemex, before this privatization.

Could the government have executed this gasoline price rise differently? Also, what does this mean for Mexico in terms of the broader picture along with other issues being faced by the nation. Let’s look at that in the next article.

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