COMPENSATING FORCES REDUCE THE BURDEN ON THE POWER SECTOR

Mexico's fuel prices are expected to move in opposite directions in the near term. Refined products prices are not expected to decrease given tight availability of refining capacity, but natural gas prices are expected to calm down after a year of record levels. This small relief in gas prices will help to reduce the impact of increasing liquid fuels prices in the power sector.

- Oil and refined products. Crude prices as well as refined products prices are expected to remain high in 2006 and 2007. In the refined products market, the combination of strong demand for light products and the lack of refining capacity with adequate complexity to match that demand continue to push refining margins up.
- Natural gas. Mexico's government faces a choice of continuing to implement short-term solutions to provide transitory relief from high prices through market intervention, or to promote more integral or healthy solutions to manage price risks and volatility among Mexican gas consumers.
- Retail power tariffs. Industrial power tariffs are expected to experience some relief during the first quarter of 2006, but the respite will be temporary. CERA expects industrial power tariffs to increase 5 percent on average in 2006. Record prices in 2005 again pushed Mexico's Congress to intervene in the power market to limit the cost increase for residential users.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.