The rise in fuel prices that ignited the protests is a part of the energy reform that Mexico began in 2013. The upstream portion of the reform, which removed the 75-year monopoly the Mexican state held on oil production, was removed by congressional vote. Bidding rounds were held starting in 2015, and there are now private companies investing in oil exploration and production in Mexico's territory.
But the fuel price increase is part of the downstream 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 retail fuel 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 in 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 scheme derived from the U.S. Gulf Coast prices and creating two additional taxes on fuel sales that went into effect on Jan. 1, 2017. The scheme will precede the full 2018 liberalization of fuel prices. By then, the government expects prices to fluctuate in accordance with a pricing scheme reflecting the global price of crude oil.
Consequently, any plan to expose Mexican consumers to fuel prices that could fluctuate depending on market conditions would be fraught with risk. Mexico's revenue shortfall when oil prices collapsed in 2014 compounded those risks. The sudden price decline and Mexico's hedging of oil revenue (which locked prices for Mexican crude oil exports in at a set yearly level) cost the country. In 2012, the federal government received 852 billion pesos (roughly $40 billion) from oil revenue, and by 2015, this figure had dropped to only 408 billion pesos. The magnitude of Mexico's fuel price hike is the direct result of this revenue shortfall. The new pricing scheme and new taxes drove fuel prices up between 14 and 20 percent from their previous levels.
Unpredictable Risks
Despite the current debacle in Mexico, even greater risks could lie ahead. Mexican President Enrique Pena Nieto has publicly stated he does not intend to renege on his decision to raise fuel prices. It is a logical choice: A sudden policy shift would introduce too much uncertainty over Mexico's future regulatory decisions for the domestic fuel market. Potential investments in fuel storage, transport and retail infrastructure could even 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.
The risk comes from the unknown aspects of the protests, particularly if they grow. If a security forces crackdown at a demonstration takes lives or inflicts 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), jumping on the bandwagon. 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 them 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. Because there are multiple interests and organizations from various regions involved, 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 fizzle out.
Any Reversal of Reform
So Pena Nieto is in a difficult spot. On the one hand, reneging on a part of Mexico's energy reform would tell investors that pro-business reforms in Mexico bow to extreme pressure from street action. On the other hand, pushing forward with the price hikes is going to inflame protests in the short run and potentially hurt the ruling Institutional Revolutionary Party (PRI) in the 2018 vote, which promises to be rather competitive. The protests will not easily roll back energy reforms — those were etched into the country's constitution years ago. Still, any reversal of Pena Nieto's reform drive would erode investor confidence in Mexico, complicate the country's fiscal picture and likely hand the PRI a notable political defeat.
