Fossil-fuel subsidy reform in Mexico Green Growth & Sustainable Development Forum November 2014 1
14 Retail Prices in Mexico do not accurately follow international prices (USA). Mexico and USA regular gasoline retail prices 12 Jan-Dec/09 (prices unchanged) 10 8 Nov/98 (16%) Mx$ / lt 6 Dec/96 (8%) Dec/97 (5%) Oct-Dec/07 (prices unchanged) 4 Apr/96 (6%) USA price Mexico price 2 Mar/95 (36%) Dec/95 (8%) 0 Jan-1994 Jan-1995 Jan-1996 Jan-1997 Jan-1998 Jan-1999 Jan-2000 Jan-2001 Jan-2002 Jan-2003 Jan-2004 Source: SHCP-SSI, with EIA and Pemex data, September 2014. Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 2
A measure of subsidies is the negative excise tax (IEPS) imposed on fossil fuels. Mx $ / litre 14 12 10 8 6 4 2 Components of the retail price of gasoline and diesel Gasoline and diesel are taxed with an excise tax (Impuesto Especial sobre Producción y Servicios, IEPS). The tax rates are calculated every month as the ratio of (adjusted) retail prices over (adjusted) international prices (spot prices in Houston, TX). If the international price is higher (lower) than the retail price, the excise tax would be negative (positive). 0 Reference Price Quality Adjustment Logistic Storage Cost Price net back in Pemex terminal IEPS (Excise Tax) Wholesale Price in Pemex terminal State's Tax Carbon Tax VAT Distribution and Commercialization Retail Price Two additional excise taxes are imposed on gasoline and diesel: a carbon tax (started on January 2014) and a IEPS for states. Source: SHCP-SSI (March 2014). 3
A tax turned into a subsidy 2.0% Impact of Implicit Subsidies on Gasoline and Diesel (% of GDP) Up to 2005 the Mexican Government collected a positive tax. 1.5% 1.0% 0.5% 0.87% 1.22% 0.90% 0.78% 0.68% 1.34% 1.58% 1.02% 1.29% 1.57% 1.14% 0.61% 0.16% From 2006 up to this year, the tax has been negative: consumers are subsidized. In 2008 the subsidy reached 1.8% of Mexican GDP. 0.0% -0.5% -1.0% -0.40% -0.42% -0.12% -0.58% -0.23% -0.65% The subsidy will be reduced to 0.3% of GDP during this year, and it is expected that next year the tax collection will be positive. -1.5% -2.0% -1.14% -1.43% -1.83% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: SHCP-SSI. 4
Subsidies distort relative prices and decisions made by consumers. Country 2010 Per-capita consumption USA 1,662 Canada 1,255 Saudi Arabia 851 United Arab Emirates 587 Venezuela 542 Japan 457 Mexico 377 Germany 325 UK 324 Russia 315 Italy 231 Chile 194 France 165 Spain 165 Argentina 135 Brazil 115 China 69 Per capita consumption of regular gasoline in Mexico is 227% higher than that of Brazil (another oil country) and 94% higher than Chile. Mexican per capita consumption is 118% higher than that of Spain and Frances, countries with GDP per capita 3 y 4 times higher than Mexico s. Fuente: UPINT, con datos del Banco Mundial y la EIA. 5
Subsidies associated to consumption levels are regressive. 35% Consumption of regular gasoline per income deciles 34.9% The richest 20% households concentrate more than 50% of the subsidies for gasoline. 30% 25% 20% 20.2% On the other hand, the poorest 30% households concentrate only the 0.9% of this subsidy. 15% 10% 5% 0% 14.0% 10.2% 6.9% 4.9% 1.9% 2.7% 3.4% 0.9% I II III IV V VI VII VIII IX X Source: SHCP-SSI, with data of INEGI, Household Income- Expenditure Survey, 2012. 6
The same story is true for LPG prices. (Mx$ / ton) 18,000 16,000 Estimated 14,000 Discount of 10% and hold for 2009 12,000 10,000 Adjusted reference price Carbon tax was introduced 8,000 Average retail price 6,000 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Source: Pemex, September 2014. 7
For the last 14 years LPG has been subsidized. 0.00% -0.05% -0.10% -0.15% -0.20% -0.25% -0.03% -0.09% Subsidies for LPG (% GNP) The subsidy is calculated as the difference between the (adjusted) retail prices and the (adjusted) international prices (spot prices in Houston, TX). -0.05% -0.05% -0.09% -0.21% -0.06% -0.18% -0.13% -0.03% -0.04% Due to an increasing the retail price (about 8% a year) and decreasing international prices, the subsidy has diminished to 0.04% of GDP in 2014. -0.30% -0.27% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: SHCP-SSI using Pemex data (october 2014). 8
pricing policy and implicit subsidies Fossil Fuels 20% 15% 12.1% 11.1% 15.0% 17.0% The richest 20% households concentrate 32% of the subsidies of LPG. On the other hand, the poorest 30% households receive only the 16.9% of this subsidy. 10% 8.5% 9.5% 9.8% 6.0% 6.7% 5% 4.2% 0% I II III IV V VI VII VIII IX X Source: SHCP-SSI, usuing data from INEGI Household Income-Expenditure Survey, 2012. 9
The reform will stop subsidies for fossil fuels. In December 2013 the Constitution was amended. Profit sharing, Production Sharing contracts for exploration and extraction of oil and natural gas. Private (both foreign and domestic) investors can refine oil, process natural gas, transport and deliver oil and natural gas derivatives, that potentially attract new investment. In August 2014 additional laws were enacted. The governance of PEMEX was reformed, with a Board that for the first time will comprise independent Directors responsible for establishing the company s strategic vision of the company supported by committees. A new upstream regulator will award and administer the contracts. Revenues from oil and gas production will be managed by a new autonomous entity, the Mexican Petroleum Fund for Stabilization and Development. A transitory mechanism for gasoline and LPG pricing has been established. From 2015 through 2017, the Federal Government will determine maximum gasoline and diesel prices, consistent with expected inflation and international prices. Beginning in 2018, gasoline prices will be liberalized and determined by market conditions. From 2015 to 2016, maximum prices will be determined by the Federal Government consistent with expected inflation an international prices. From 2017 on, prices will be liberalized, and a subsidy for rural and urban poor must be in place. 10