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Thursday, Feb. 2, 2012

Columnist says López Obrador's proposal to build 5 refineries to cut gasoline prices won't work

Columnist Sergio Sarmiento said populist presidential candidate Andrés Manuel López Obrador's proposal to build five refineries to cut gasoline prices in Mexico won't work.

Sarmiento said Mexico is importing around 50% of the gasoline it consumes. Domestic prices has been rising to meet international market levels, causing grumbling among the citizenry. Sarmiento said construction of the refineries would cost $40 billion to $50 billion — money the state-run oil company Pemex does not have. He said any excess money Pemex has should be spent in extracting oil, which would provide Pemex a far higher return than refineries. He said in 2007, it cost Pemex $4.36 a barrel to extract oil, and that although that price has risen, it is still a far cry from the $106.30 a barrel Mexican oil fetched Jan. 31.

Sarmiento said new refining capacity should be left to private companies. He said Mexico is also benefiting from excess capacity in U.S. refineries.

Still, he said Mexico spent 160 billion pesos ($12.5 billion) subsidizing gasoline and other fuels in 2011. On Saturday in Tijuana, National Action Party presidential hopeful Santiago Creel said the energy sector needs to be opened up to allow more competition and reduce prices for Mexican consumers. He said Mexico was buying gasoline at around 14 pesos per liter and is selling it at around 10 pesos, a subsidy that is causing major problems in public finances. "This has to change," Creel said. That translates to buying gas around $4.12 a gallon and selling it for $2.95 a gallon. Creel's 14 pesos a liter price probably was high as U.S. gas is selling for well under $4 a gallon. Sarmiento's column (PDF).
AAA report on U.S. gas prices.

Although the difference between the price of production and the sale price of crude oil is large, much of that profit goes to fund the Mexican government, often leaving Pemex starved for cash. In addition, the oil sector is hugely inefficient, employing far more workers per barrel extracted than other oil companies.