M-RCBG Associate Working Paper No. 34
Preparing for Liberalization of the Retail Gasoline Sector in Mexico: A household-level welfare analysis
Joyce Hahn and Hannah Pitt
Mexico does not have a long history of subsidizing gasoline. In fact, between the 1990s and early 2000s, consumers paid an implicit tax on gasoline that averaged about one percent of GDP with a subsidy only arising when the price of oil skyrocketed in the mid-2000s. Since then, the Secretaría de Hacienda y Crédito Público (SHCP) has lost hundreds of billions of pesos in government proceeds, forcing itself into a position where it must constantly weigh the trade-offs between providing cheap gasoline to consumers and collecting more revenues to spend on public goods and services for citizens.
This report takes a deeper look at the Mexican context and first explores whether the SHCP can promote fiscal health and social progressive policy better than it currently does by using different methods to set the price of gasoline. Two possible scenarios are considered, one where the price of gasoline follows the US Energy Information Administration’s forecast and the other where the price of gasoline experiences an external shock, similar to that seen in the first half of 2008. Ultimately, this report finds Mexico can have stronger fiscal health in both scenarios as well as roughly similar levels of social progressiveness in the first scenario if the SHCP sets the price of gasoline to follow a 3 month average of international prices OR float within a predetermined band of prices. While these pricing mechanisms lead to negative welfare impacts in the second scenario and have the potential to stir up political opposition in both cases, additional measures can be undertaken to help alleviate these concerns and are discussed in the second half of this report.
Recognizing Congress may liberalize the retail sector of gasoline in the next couple of years and strip the SHCP of the ability to set the price of gasoline, this report also looks at how the government can spend revenues during future periods of high oil prices to effectively mitigate adverse welfare impacts on citizens. The authors have conducted an independent analysis that finds households in the bottom quintile incur a one percent loss in real expenditure for every ten percent increase in the price of gasoline. While this is comparable to losses suffered by wealthier groups, the richest Mexicans capture a share of the subsidy that is five times larger than that of the poorest, indicating artificially low prices have been an inefficient way of protecting consumers and redistributing resources. This report finds a cash transfer program may better use public funds to target economic assistance to the poor during a sustained increase in the price of gasoline without imposing a fiscal burden on the government. While there are many different versions this program could take, one possibility is attaching an additional cash transfer to the Oportunidades program that compensates poorer households for the negative welfare impacts they face during times of high oil prices. Compensation for a ten percent increase in the price of gasoline would roughly cost the government a total of MXD 1.5 to 2.7 billion (USD 0.1 to 0.2 billion), which is more than financially feasible given this amount equals a small fraction of one percent of oil revenues in 2012. Moreover, for every peso spent on such a cash transfer program, the poor would receive four times as much as it would have for every peso spent on the gasoline subsidy in 2012.
Should the SHCP decide to change the status quo and pursue one or both of the above recommendations, guidance on how to design and administer new policies as well as craft a strategy to gain political support is provided. In both cases, it is paramount that the Hacienda continues to make policy decisions and operations more transparent. This will do the most to credibly convince the public that the SHCP is undertaking progressive change as well as effectively diminish the persuasive sway of political opponents who use nationalistic and populist rhetoric to gather popular momentum and appeal.