Background on Andrés Manuel López Obrador
Andrés Manuel López Obrador, the former President of Mexico (2018-2024), is known for his populist policies and rhetoric. One notable incident occurred in July 2022 during a meeting with then-US President Joe Biden at the Oval Office of the White House. López Obrador suggested that American citizens cross into Mexico to buy cheaper gasoline.
The Gasoline Subsidy and Its Consequences
López Obrador’s offer reflected the gasoline subsidy that, in 2022, cost Mexican public finances 40 billion pesos. However, the market soon exposed the folly of this populist approach.
Currently, a liter of regular gasoline in Texas, a major exporter to Mexico, costs $12.02 pesos per liter. In contrast, the price in Mexico is double that, at $23.82 pesos per liter.
Fiscal Burden and Informal Economy
Mexico’s informal economy accounts for 55.4% of the population, creating a challenge in taxing those outside the formal system. To address this, the government has turned to an unspoken revenue source: gasoline.
The aggressive Impuesto Especial sobre Producción y Servicios (IEPS) applied to gasoline has become a significant source of public revenue.
The High Cost of Gasoline in Mexico
Under the current regime, gasoline prices in Mexico are exorbitant. This situation is a direct result of the government’s actions, which criticized similar practices by previous administrations. Now, however, they have implemented even more detrimental policies.
The lack of transparency in managing the fuel market and the government’s manipulation of consumers through artificial price ceilings, such as the infamous 24 pesos per liter limit, have negatively impacted Mexican consumers.
As global fuel prices decrease, the fixed minimum price in Mexico continues to burden consumers. This situation is exacerbated by the government’s reliance on price controls that harm consumers, limit market competition, and monopolize the market in the hands of the struggling state-owned oil company, Pemex.
Implications for Public Finances and Consumers
The high gasoline prices generate substantial additional revenue for the public finances each month, amounting to billions of pesos. These funds should rightfully go to consumers’ pockets.
While high gasoline taxes help prevent fiscal collapse, the artificial floor imposed on consumers negates competitiveness and favors an ineffective state that has failed to enact meaningful tax reform.
Key Questions and Answers
- What is the current situation with gasoline prices in Mexico? Gasoline prices in Mexico are significantly higher than in the United States, particularly in Texas. The price difference is due to various factors, including government policies and market dynamics.
- Why are gasoline prices so high in Mexico? High gasoline prices in Mexico are a result of government intervention, such as price controls and taxation. These policies have created an artificial floor that prevents lower global prices from benefiting Mexican consumers.
- How does the informal economy affect tax collection in Mexico? With 55.4% of the population engaged in the informal economy, taxing these individuals is challenging. The government has turned to indirect taxes like the IEPS on gasoline as a primary revenue source.
- What are the consequences of high gasoline prices for Mexican consumers? High gasoline prices impose a substantial financial burden on Mexican consumers. The lack of transparency and artificial price controls further exacerbate this issue, limiting consumer choice and competitiveness.
