Forbes Weighs in on Mexico’s Energy Costs

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Updated: January 9, 2017

Last week we told you of the uprising that ensued in neighboring Mexico following a hike in fuel and energy costs.  The price hike was implemented at the start of the New Year and was met with much resistance by the Mexicans as it even caught the attention of international agencies.  Forbes, an American business magazine with international distribution wrote an article on the subject saying that the Mexican Government is doing the correct thing since things should be sold for what they cost to produce.  The article went on by stating, quote, “It’s entirely possible that some people are too poor to pay the higher prices that result and the solution to that is very simple indeed–subsidize the poor people, not the item in question for everyone. This is also, oddly enough, one of the single most effective measures at beating climate change according to the International Energy Authority. All in all raising Mexican gas and diesel prices to the world level is a very sensible indeed thing to be doing. Sure, people may not like it very much but it’s still the right thing to do.”  End of quote.  The article went on to justify its position in agreeing with the price increase by comparing other oil producing nations that have fallen into a trap that they now have to escape.  Tim Worstall, author of the piece on this matter continued by noting that the basic background here is similar to what have happened in many oil producing states where the producing countries feel that their citizens should get it cheap; so, it has, historically, been cheap. Worstall wrote, quote, “Iran, Saudi, Venezuela, Mexico, they’ve all sold gas and diesel to the populace at below the opportunity cost; sometimes above the production cost but below the opportunity.  What has happened in the oil rich nations is that they’ve seen the black stuff just bubbling up out of the ground, near for free (Saudi’s production costs are perhaps $8 a barrel and so why shouldn’t the people have gasoline at equivalent to $8 a barrel?). The answer is that it could be sold for, say, $45 a barrel and that $37 is an economic loss. Mexico rather fell into this trap. And they’re climbing out of it too.”  End of quote.  This past week, various parts of Mexico saw residents carrying signs denouncing President Enrique Pena Nieto whose administration implemented the twenty percent increase.  President Nieto has since declared that the prices will eventually fall due to the 2014 energy reform he had instituted; referring to a move that ended the 70-year-old monopoly that Pemex had enjoyed.  In March 2017, the Mexican Government plans to end subsidies and let the market dictate prices.