Gasoline stations in Mexico have all been exactly the same for decades. PEMEX, the state-owned behemoth has been the only show in town. Pull up to any of 11,400 stations nationwide and the experience is very similar: PEMEX stations selling PEMEX gasoline.
This is all changing. Starting April 1, 2016, private companies can now import, transport, store, and distribute gasoline and diesel. The change is part of a broader set of energy reforms aimed at increasing private investment throughout the Mexican energy sector. Already non-PEMEX stations are starting to appear like “La Gas” and “Hidrosina”.
Making this a competitive market will not be easy, but the reforms have great potential to improve service quality and, eventually, to increase efficiency and reduce prices.
The reaction thus far has been positive. Twitter users like Rubén Linares have reported that the new stations are better illuminated, cleaner, and more modern. The new stations are also introducing other innovations like electronic payment systems. If these stations can earn a reputation for better quality service they will pull business away from PEMEX stations.
PEMEX stations are franchised. So there is already some incentive for station owners to provide good service. The problem is, however, that because all stations are branded PEMEX, there is also severe free riding. Why improve your station’s service quality when your efforts will mostly benefit other owners? Moreover, PEMEX’s franchising rules severely limit the scope for differentiation. For example, all PEMEX stations have the exact same limited snack and drink options.
Eventually, retail competition will also put downward pressure on prices. Currently, retail prices for gasoline and diesel are set nationally by the Mexican finance ministry. The current price for non-premium (“magna”) gasoline is $2.75 per gallon compared to an average price in the United States of $2.29 per gallon. All stations in Mexico charge this price, including the non-PEMEX stations.
However, these price controls for retail gasoline and diesel will be removed starting January 1, 2018. It will be very interesting to see what happens to prices. As in any market, there will be stations that enjoy local market power. But there will also be stations that cut prices to increase market share and new stations that open in high-demand locations.
In the longer-run, a competitive retail market will also help increase efficiency upstream. You might ask, where do gas stations in Mexico buy gasoline? For the moment, they buy it from PEMEX. This vertical structure raises a couple of serious concerns. Probably most importantly, you worry about input foreclosure i.e. that PEMEX will favor PEMEX-branded stations. PEMEX could try to charge lower prices to PEMEX stations, or could try to refuse to sell products to non-PEMEX stations. It will be important for the Mexican regulator to keep a close watch on this type of non-competitive behavior, perhaps with the assistance of an independent advisory panel like California’s Petroleum Market Advisory Committee.
We are also beginning to see private investment in these upstream sectors. In particular, some major petroleum consumers are starting to import their own petroleum products. It will be important to ensure that new products conform with Mexico’s environmental regulations (e.g. low sulfur gasoline), but this end run around PEMEX is extremely promising. Not only can this reduce costs for consumers, but it will also put competitive pressure on PEMEX to reduce costs.
These upstream markets will not become competitive overnight. PEMEX has long dominated petroleum production, refining, imports, transport, and storage, so price regulation will be necessary for wholesale petroleum products for the foreseeable future. But, over time, this price regulation is going to become less and less necessary as private investment expands. And moving forward, these investment decisions will be increasing driven by market factors, presumably leading to more efficient choices.
So move over PEMEX. It is going to be an exciting next couple of years in the Mexican petroleum sector.
Lucas Davis is an Associate Professor of Economic Analysis and Policy at the Haas School of Business at the University of California, Berkeley. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.