The Real Cause of Mexico’s Petrol Crisis

Riots sweep Mexico as people flood to the streets to protest rapidly rising petrol prices. Rumours abound of decisions made by a corrupt cabal of selfish elites behind closed doors.

As a student of the London School of Economics, I was behind those closed doors one night. And I took notes.

It was the 2015 roundtable for energy reform and economic growth- part of the Mexican Week at the London School of Economics.  I had the opportunity to hear the views of respected businessmen from Mexico, including Roganio Ramirez from ECANAL, Gabriel Farfan of Comunidad Mexicana, and an official from the Ministry of Finance.  Analysing the effects of oil and the Mexican economy, the panel was divided into two camps, revealing a potential failure on the part of the Ministry of Finance to respond to the weakness in oil prices and a potential liquidity disaster for Pemex.

The representative of the Ministry of Finance presented an optimistic plan for the recovery of the energy sector and the state-owned company Petroleos Mexicanos (PEMEX) driven by foreign investment. In theory, foreign investment would allow the development of hydrocarbon extraction sites in deep waters of the Gulf of Mexico and the increase in production. With the increase in production, Pemex would liberalise the domestic selling price of petrol allowing the importation of petrol in 2017 and entirely market determined prices by 2018.

There were three mistakes in the planning proposed by the Mexican government that explain the current crisis.

First the low oil prices.

The second factor is the high competitiveness of foreign companies that have little incentive to invest in the exploration and development of deepwater drilling sites in Mexico.

And third, the master plan ignored the corruption prevailing in the oil union and did not take measures to avoid the excesses and the waste of millions of dollars that disappear with impunity.

Rogelio Ramírez estimated that oil production would actually decrease rather than increase- a correct prediction. With the fall in oil prices, the only way keeps PEMEX solvent has been steep rises in prices in consumers.

The current crisis is no surprise, and informed observers were predicting it for the past two years. Today’s riots are no surprise.


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