President Andrés Manuel López Obrador appears to have kept his promise. The price at which liquefied petroleum gas (LP) is sold to the public has not exceeded inflation in recent months after the imposition of the price cap that was established as of August last year, as a measure of last resort after a constant rise.
The federal government established the price cap at the end of July 2021, as an emergency measure in the face of the constant increase in the international price of propane -the main compound of LP gas-,
But the measure was not effective immediately. Five months passed after its start-up for prices to reduce their growth rate below the inflationary level, according to data from the Inegi national consumer price index. In July of last year, the year-on-year rise in fuel was 35%. From then on, it continued to register increases above inflation –although lower than in July–, until last January the price was 3.1% lower than that seen in the same month of the previous year.
And that streak, in which the sale prices of LP gas have been placed below inflation, has continued in the following months, with its most pronounced increases –but still slight– between March and May, when the war between Russia and Ukraine shot up the international price of all energy and the local measure was not enough to stop the impact. In May, the year-on-year increase was 2.4%, and has been the highest so far this year.
The price cap measure was initially scheduled to be in effect for only six months , but the Energy Regulatory Commission has steadily extended its duration, leaving it without a defined duration. Analysts already project that this will continue for the remainder of the six-year term.
A few days before both announcements, President López Obrador had acknowledged that he was not fulfilling his promise to keep LP gas prices below inflation. Both measures were announced with little time for analysis, analysts say. Although some time later, last December, the Federal Economic Competition Commission (Cofece) published a document acknowledging that between 2016 – when fuel prices were liberalized – and 2021, distributors increased their gross profit margin by 145% at the national. Thus, the antitrust regulator opened the door for the fees and consideration of those who participate in the market to be regulated.
In July –the most recent data– inflation stood at 8.96%, the highest figure since 2000. And the price of fuel was 8.1% below that seen in the same month last year. “Inflation is lower, but it is repressed inflation,” says Óscar Ocampo, a researcher at the Mexican Institute of Competitiveness (IMCO).
The policy has been criticized by analysts since its inception, saying it was a price-containment measure but would fail to fix the industry’s imperfections, which include limited regulation, lack of infrastructure and few market participants. . And the criticism still continues. Specialists are far from qualifying it as an effective policy and assure that its effects have only been short-term. “It continues to be a bad idea, you are not fixing the problems of the LP gas market, you are not correcting the distortions that exist in the market,” says Ocampo. “If you put a cap on the price, it’s a little natural that it won’t shoot up, but it should also be noted that this has to do with the fact that the international price has stabilized.”
The price at which LP gas is sold – the fuel most used by Mexican families – is largely determined by propane, whose price is defined by market conditions and volatility. The international price of Mont Belvieu propane has continually broken records. It has yielded in recent months, but its price remains well above the prices seen before the start of the pandemic.
“Prices are rising because the international reference is very high, if the price of LP gas reflected market conditions, it would be above it,” explains Susana Cazorla, a former official and specialist in the sector. The prices announced by the Energy Regulatory Commission each week do not show a clear trend, but the kilogram of LP gas has remained above 20 pesos since the start of the measure. In July -when the Inegi shows a year-on-year drop in the price of 8.1%- it reached a maximum price of 25.93 pesos per kilo.
Analysts acknowledge that the price of fuels -including gasoline- are below inflation, but they assure that in the case of LP gas it is creating distortions in the market that could have long-term effects and they criticize that the measure is benefiting to large consumers, who are not forced to ration their fuel consumption. “Someone is eating this price and they are the distributors and that has important effects on the LP gas chain. The expenses cannot be covered, there have been layoffs, there is a lack of maintenance, the routes have been shortened and then if something has been affected it is the service”, says Cazorla.
