Monday, June 23, 2008

High Prices Spark a Diesel Crisis at Mexico-U.S. Border

By Carlos Luken

Gas buying consumers rushing across the U.S.-Mexico border has been a tradition that highlights another of the binational idiosyncrasies that make up this region’s many quirks. But recently the trend has reversed from Mexicans buying cheaper U.S. gas to Americans flocking to Mexican pumps to purchase diesel fuel at cut rate prices.

As escalating oil costs have a consequence on gas and diesel fuel prices worldwide, border consumers are finding ways to ease their pain.

Like all countries, diesel fuel in Mexico is considered a vital commodity not only because of its importance to the transportation industry but also because of the country’s large rural economy. Diesel is also a crucial power source in the agriculture, fishing and industrial sectors. Obviously any unrestrained price increases have a larger than life blow on overall consumer prices and a towering impact on the nation’s millions of poor.

Adding to the dilemma is one of Mexico’s most inexplicable paradoxes; being a world class producer of crude oil, Mexico has diminutive refining capability. The country exports low priced crude and imports refined fuel at considerable mark-ups. Consequently, for lack of better and more constructive economic policies or mechanisms, the Mexican government has traditionally offered subsidies to trade and individual consumers, thus preferring to pay the price for a fictitious economy in order to avoid widespread discontent

Analysts estimate that Mexico’s fuel subsidies are costing the country upwards of US$10 billion per year, which ironically is the exact amount President Felipe Calderon has repeatedly asked congress for in order to build refineries. An inconsistency that will most likely continue as President Calderon’s energy reforms remain stalemated in the highly partisan atmosphere of the Mexican congress.

The government subsidy allows consumers to pay for diesel fuel at an important discount when compared to the U.S. market (at this writing diesel prices in the United States are over US$5.00 per gallon, while in Mexico the price is less than half that amount).

The arrangement more or less works in the Mexican interior states that are far from the northern border or the ocean. But the opposite is true in border or coastal states where foreign consumers can avail themselves of the product at subsidized prices. In these regions normal demand is greatly increased, at times doubled.

This situation arouse this week on the California-Baja California border. In Tijuana demand shot up almost 40% overnight as U.S. tourists and truckers crossed the border to purchase diesel fuel. The same was true for Ensenada, where truckers, tourists and boaters took advantage of the reduced price and filled their tanks and spare containers. Compounding the problem was the alleged bulk buying of diesel fuel by bargain hunters whose intentions were to resell on the U.S. side of the border. In a very short time diesel fuel disappeared from Mexican gas pumps.

Suddenly a crisis erupted, as Baja California’s commercial transportation industry was brought to a standstill. Municipal buses, fire engines and ambulances stopped running. Long lines where visible everywhere, while gas stations became huge parking lots for trailer trucks waiting for fuel to arrive. What little reserves could be found by resourceful station managers was rationed in small allotments. Tourists driving diesel powered trucks were denied service.

The crisis expanded to the U.S. side of the border, where demand spiraled and truckers had no choice but to pay US prices in order to meet clients’ immediate industrial and agricultural market needs. Demand was also increased due to speculative hoarding. 

In time, as anxious consumers on both sides of the border began to feel the pinch thieves began siphoning gas from trucks. As well, complete truck gas tanks were dislodged and stolen from their chassis.

Yet finally, PEMEX (Mexico’s oil and gas monopoly) announced from a regional office that a ship carrying diesel fuel for the region would arrive and reduce the crisis.

Baja California’s current fuel crisis may be lessened but it is very doubtful it will disappear. PEMEX is temporarily resolving only the consequences and not the causes of the crisis. No one can deny that the main cause is surging oil prices on world markets, but many analysts predict carryover effects caused by Mexico’s subsidy policies, hoarding and U.S. buyers flocking into Mexico will have permanent effects on local markets.

Some worry that Baja California’s diesel crisis is only the tip of an iceberg that may spread along the entire border and, in time, to other areas both in Mexico and the U.S. – unless comprehensive practical and not political joint arrangements are negotiated.

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Carlos Luken, a MexiData.info columnist, is a Mexico-based businessman and consultant.