MEXICO: PROTECTING ITS GAS MARKET, COMPROMISING DEVELOPMENT

Mexico's natural gas price linkage to the United States has come under increasing pressure as high US natural gas prices are directly translated to Mexican customers. The government has intervened and offered various hedging tools, but some consumers, particularly industrial organizations, have called for a dramatically different price mechanism to reduce the US market's influence. The Precio México proposes a weighted average comprising the Mexican production cost-a major component of around 80 percent-and the estimated cost of US gas imports. The proposal rests on the economic fallacy that government can regulate a commodity price below market value without creating significant economic inefficiencies. The risks and the erroneous signals to market players derived from partially disconnecting Mexico's gas price from the US market include

- Delay private sector gas imports from the United States. US gas imports would be reduced to the minimum or to meet logistical requirements. No third party would willingly sell imported gas below cost in the regulated Mexican market, leaving Pemex with the sole mandate to import gas under the proposed price conditions.
- Major financial burden. Eliminating US imports quickly is unrealistic. Lowering the gas price below market will impose a major burden on Pemex and likely continue to erode its financial position.
- Significant incentives for exports to the United States. The below-market sales in Mexico create a wide window of opportunity for exporting Mexican gas to the US market. The estimated arbitrage created by a gap of more than US$2 per million British thermal units if the gas were shipped to the US Northeast market would ironically potentially lower US prices, thus subsidizing US consumers.
- The Precio México would not resolve the real issue. Prices are high in both the United States and Mexico because supply is short. Rather than promote further development of Mexico's supply potential, this proposal would actually reduce Pemex revenues and, as a result, its capital available to invest in new natural gas production.

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