What’s Really Behind These Fuel Wars?

For starters, the PRI is taking it in the shorts again
BY: JIM SCANCARELLI

Mexico has marked the start of 2017 with a wave of protests over a proposed increase in fuel prices. These protests involve a wide range of political groups including teachers' unions, truckers' unions, and taxi drivers blockading roads, while regular garden variety pissed off citizens have taken to the streets.

Looting also began on Jan. 1, damaging hundreds of stores across the country, with most of the ransacking occurring in urban areas such as Mexico City.

The rise in fuel prices is a part of the energy reform that Mexico began in 2013, removing the 75 year monopoly the Mexican government held on oil production. This was removed by congressional vote several years ago. Foreigners were invited in and bidding rounds were held starting in 2015, and there are now private companies investing in oil exploration and production in Mexico.

But the fuel price increase is part of more reforms, specifically those concerning the domestic fuel market. As part of overall energy reform, Mexico opened all parts of hydrocarbons production, refinement, transportation and sale, to private investment. That also meant making Mexico's subsidized gas station market attractive to foreign investors part of the plan. When it was crafting the reform, the Mexican government intended for fuel prices to be liberalized and brought into line with market prices beginning in 2018. Before that, the government set prices that were lower than the cost of producing and transporting gasoline and diesel in the country.

The government in 2016 decided to begin that process a year sooner, crafting a transitional pricing policy and creating two additional taxes on fuel sales that went into effect this New Years day. The scheme will precede the full 2018 liberalization of fuel prices. By then, the government expects prices to fluctuate in accordance with pricing reflecting the global price of crude oil.

Will the government back down? Doubtful. Despite the current debacle in Mexico, even greater risks could lie ahead. If the president gets wobbly now, it will spook foreign investment by showing Mexican policy to be unreliable. Potential investments in fuel storage, transport of fuel and retail gas stations could be reduced if the government suddenly changed course as a result of public pressure.

Moreover, because the Mexican Constitution bars Pena Nieto from running for another term, he has little to lose politically, and thus little incentive to back down. His poll numbers are already in the dumpster, so he isn’t even risking his legacy.

The risk comes from the unknown aspects of the protests, particularly if they grow. If the police crack down at a demonstration and take lives or inflict mass injuries, it could trigger even more unrest.

There is also the issue of other political parties, such as the Party of the Democratic Revolution (PRD), piling on. The party has announced protests for next week in Mexico City. This move to oppose Pena Nieto's unpopular policy makes sense with a presidential election set for next year. But the PRD joining the protests confers some legitimacy on the demonstrations as well, making it possible for the demonstrations to swell.

It is unclear how long the protests will last or how violent they will become. At the moment, it is a mass display of unconnected protests rather than a coordinated effort at undermining the energy reform. And because there are multiple interests and organizations behind them, they will not find common ground easily. (Apart from general opposition to higher fuel prices), or be able to quickly create the connections necessary to form a unified front against the government. Even with the logistical support of parts of the PRD, labor unions and a widespread online campaign, if the protest movement does not soon succeed on some level (by bringing the government to the negotiating table on the reforms, for example), it may very well fizzle out.

So President Pena Nieto is between a rock and a hard spot. On one hand, reneging on a part of Mexico's energy reform would tell investors that pro-business reforms in Mexico bow to pressure from street action. On the other hand, pushing forward with the price hikes is going to inflame protests and potentially hurt the ruling Institutional Revolutionary Party (PRI) in the 2018 vote. On the third hand the PRI is probably toast anyway so why not do the right thing for the country? Maybe history will be kinder to the PRI than public sentiment is right now.

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