News
If private companies cannot make a profit they will stop distributing gas, which will lead to shortages. el economista

Competition regulator warns emergency decree to control gas prices is illegal

Cofece also warned of the danger of shortages as a result

An emergency directive published by the federal government that seeks to set a maximum price for LP gas is illegal, according to Mexico’s antitrust regulator.

The Energy Ministry (Sener) published a document on Tuesday directing the Energy Regulatory Commission (CRE) to develop a methodology within three days under which LP gas prices can be fixed for a period of six months. The CRE is scheduled to meet on Thursday afternoon to consider the petition.

But the Federal Economic Competition Commission (Cofece) said the government’s directive is unlawful because the Hydrocarbons Law (LH) establishes that the market will determine gas prices.

“Specifically, article 82 of the LH mentions that the prices … of LP gas will be determined according to market conditions,” Cofece said in a statement.

The regulator said that maximum prices should only be set if there is a lack of competition in the market. Setting maximum  prices in a market in which competition does exist could cause shortages, Cofece said.

Price ceilings can only be set by regulators if monopoly pricing practices are detected, the regulator said. Cofece said an investigation to determine whether such practices were occurring began on May 31 but hasn’t concluded. Its chief said that before a price cap can be set, Cofece must draw up a “declaration of absence of competition conditions.”

“… While there is no final determination, prices can’t be fixed,” Alejandra Palacios said.

The CRE can intervene and set prices if it is determined that companies are colluding to set prices and effectively eliminating competition, she said.

Announcing earlier this month that the federal government would create a new state-owned company to distribute LP gas directly to consumers, President López Obrador asserted that five large distribution companies “with very high profit margins” dominated the market and are responsible for recent gas price hikes.

Experts consulted by the Associated Press (AP) said the attempt to establish a price cap is reminiscent of decades past when Pemex imported LP gas and sold it to distributors at fixed prices. Most gas is now imported by private companies that would cease to do so if they couldn’t make a profit on it.

“If the price controls reach a point where they [private companies] can’t cover the cost of the gas, they simply won’t deliver it and there will be shortages,” said Eduardo Prud’homme, a partner at Gadex, an energy consulting and analysis firm.

lp gas price rise
The steady rise in the price of gas since the beginning of last year.

“Shortages will create a black market” he added. LP gas industry association Amexgas also warned of the possibility that black markets for LP gas would emerge as did a former Cofece commissioner.

“If you impose an official price in an area where there is competition you will distort the market because the price you set won’t be the market price. If you set it very high, consumers will end up paying more. If you set it very low, producers won’t want to supply [gas] … at that price. So a black market will be created or [there will be] a gas shortage,” Miguel Flores Bernés said.

If the state oil company decided to try to serve as the importer and seller of last resort, AP said, that could create a classic problem of subsidies, with artificially cheap gas potentially being siphoned away to markets where it can be sold at market prices.

This week’s attempt to impose a six-month price cap on LP gas stems from López Obrador’s desire to keep fuel price increases below the rate of inflation, which is currently about 6%.

The president said July 7 that his government has kept its commitment to keep price rises for gasoline and electricity below the level of inflation but has been unable to do the same with LP gas, whose prices have increased “unjustifiably.”

According to the Ministry of Energy, LP gas prices increased 28% on average across the nation between May 2020 and the same month this year. The increase was 37% in Mexico City, the ministry said, while AP reported that prices in some parts of the country have almost doubled over the past year.

More than two-thirds of Mexican households use LP gas for cooking and other purposes. Gas Bienestar (Well-Being Gas), as the new state-owned distribution company will be called, will be created by Pemex within three months, López Obrador pledged July 7.

“It’s going to sell cylinders of 20 to 30 kilos of gas at low prices … without these other private companies ceasing to participate [in the gas market]. But there’s going to be competition because there isn’t [now],” he said.

Some analysts have questioned the wisdom of creating the company. Gabriela Siller of Banco Base said it is not clear how Gas Bienestar will offer gas at lower prices given the transport, storage and commercialization costs it will face.

“… Creating the [state-owned] company doesn’t guarantee that gas will be offered at a lower price. The only way for that to occur would be to incur the cost of creating the company, operating it and then selling gas at a subsidized price,” Siller wrote on Twitter.

With reports from Reforma and El Economista

Reader forum

The forum is available to logged-in subscribers only.