Mexico's Fuel Subsidies Is Now Costing More Than Profits From Oil Exports

Mexico's gasoline and diesel subsidies are costing the government more than double the extra profit the oil producer gets from higher crude prices, a sign of the growing burden to keep its cheap domestic fuel plea.

The windfall from the state-owned oil company's crude exports is likely to be less than half of the total, at $1.04 billion, due to a global fuel price rally.

The Finance Ministry has a fiscal cost of about $1.35 billion just this month as the government seeks to fulfill President Lopez Obrador's pledge to cap increases in domestic fuel prices.

Lopez Obrador's main campaign promise was that gasoline prices wouldn't increase beyond average inflation during his presidency. It also collides with his government's austerity pledges, after posting primary fiscal surpluses even during the peak of the pandemic.

The Finance Ministry said in a statement that the calculations used in the article underestimated the costs of the subsidy and underestimated the revenue from oil. The oil revenue calculation didn't include income from the sale of all hydrocarbons because it used data from March, which is a high month.

The estimate of the cost of subsidies for April and May was not provided by the statement. The Finance Ministry didn't respond to requests for comment before the story was published.

In March, Finance Minister Ramirez de la O said that the government has the ability to give energy tax relief even if the cost of gasoline and diesel goes up.

The finance chief of Mexico says that subsidies work.

One million barrels of oil a day are shipped from Mexico to clients in India and Japan. There are six local refineries in operation, another in the US that contributes to the national refining system, and an eighth under construction. Pemex is still dependent on foreign gasoline for almost half of its domestic sales despite the government's goal of eventually producing all of the nation's fuel.

Fuel prices have reached record highs in the US in recent days as the refinery can barely keep up with a rebound in demand after the lows seen during the Pandemic. More than 1 million barrels per day of refining capacity was permanently taken off-line in North America.

The IEPS excise tax on goods and services, the direct subsidy applied since March 5 this year, and the amount that Mexico is receiving for its oil exports above the $55 a barrel estimate in the 2022 budget are the basis for the calculations. Premium gasoline, regular gasoline and diesel will have a subsidy in April and May. The data from the Energy Ministry shows fuel sales volumes in April and May.

The cost for the government has increased in recent months, driven by international oil prices and the diminishing appetite to accommodate additional price increases, according to a Latin America analyst.

Lopez Obrador has sought to avoid sharp fuel price increases because of their politically damaging impact. The government expanded a temporary exemption on the IEPS tax as a way of containing the spike in prices.

Mexico will be refining less crude and exporting more on the rally.

With help from Devika Krishna Kumar.