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Mexico’s fuel subsidy costs rise faster than oil windfall

Gasoline and diesel subsidies are expected to total about $2.39 billion during May amid a global fuel price rally, while the windfall from the state-owned oil company’s crude exports is likely to be less than half of that, at $1.04 billion, according to El Financiero.

That leaves the Finance Ministry with a fiscal cost of about $1.35 billion just this month as the government seeks to fulfill President Andres Manuel Lopez Obrador’s pledge to cap increases in domestic fuel prices.

The soaring fuel subsidies cost offers a window into the difficulties to sustain one of Lopez Obrador’s main campaign promises: that gasoline prices won’t increase beyond average inflation during the six years of his presidency. It also collides with his government’s austerity pledges, after regularly posting primary fiscal surpluses even during the peak of the pandemic.

A spokesperson from the Finance Ministry didn’t respond to a request for comment. Finance Minister Rogelio Ramirez de la O had told Bloomberg News in March that the government has legroom to provide energy tax relief even if the cost of gasoline and diesel rises as Mexico also benefits from higher oil revenue.

Mexico is a major crude exporter, shipping about one million barrels of oil a day to clients from Japan to India. It boasts six local refineries in operation, another in the US that contributes to the national refining system, and an eighth under construction. While the government’s goal is to eventually produce all of the nation’s fuel, the plants have suffered from chronic underinvestment and Pemex, as the national oil company is known, is still dependent on foreign gasoline for almost half of its domestic sales.

Fuel prices have surged to record highs in the US in recent days as refiners 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 during the past two years in North America, further tightening supplies.

The calculations by Bloomberg Economics are based on the monthly stimulus to the so-called 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. The analysis also considers the subsidy for premium gasoline, regular gasoline, and diesel set for April and May. It applies March fuel sales volumes to April and May as that is the latest data from the Energy Ministry.

“The cost for the government has sharply increased and recently accelerated, driven by international oil prices and the diminishing appetite to accommodate additional price increases,” Hernandez, a Latin America analyst at Bloomberg Economics, said. “In March the government started providing a direct subsidy on top of the foregone taxes that was the initial mechanism to smooth price adjustments.”

Since his election in 2018, Lopez Obrador has sought to avoid sharp fuel price increases because of their politically damaging impact. The government recently expanded a temporary exemption on the IEPS tax normally wielded on gasoline as a way of containing the spike in prices.

Source: El Financiero

Mexico Daily Post

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