Mexico is a net exporter of oil by the broadest measure that encompasses both crude oil and petroleum products. However, like many other major oil producing countries, it depends on cross-border and global trade to meet its need for petroleum products. Most of Mexico's petroleum trade is with the United States, the destination for most of Mexico's crude exports and the source of most of its refined product imports.
Since reaching a peak of nearly 3.4 million barrels per day in 2004, Mexico's crude oil production has declined each year (Figure 1), although at a slower rate since 2010. Much of the production declines are the natural result of aging fields, particularly Cantarell and other large offshore fields. Petroleos Mexicanos (Pemex), the state-owned oil company, is the sole oil operator in the country, and the Mexican constitution prohibits foreign ownership and investment in the exploration, production, refining, and marketing of the nation's hydrocarbon resources. Earnings from the oil industry, including taxes and direct payments from Pemex, accounted for 34 percent of total government revenue in 2011.
In an effort to reverse the declining production, the Mexican government passed the 2008 Energy Reform to create incentive-based service contracts with foreign oil companies. Under the new arrangement, Pemex retains ownership of the crude oil produced and provides a fee-per-barrel rate to encourage technological innovation that would increase production. Since passing the 2008 Energy Reform, Pemex has entered into a handful of partnerships, but has yet to attract major international oil companies. The projects so far have been concentrated in lower-risk production areas, where a relatively high recovery rate is likely.
Falling crude oil production in Mexico has contributed to lower crude oil exports both to the United States and the rest of the world (Figure 2). From 2003 to 2012, the United States received roughly 80 percent of Mexico's crude exports. Despite the declining export volumes, this ratio has stayed fairly constant. Increasing production in the United States has offset some of the demand for light sweet crude oil imports from countries other than Mexico, but has not yet affected the U.S. demand for Mexican crude, which is primarily heavy.
Mexico's consumption of refined petroleum products increased nearly 20 percent over the last 10 years, while Mexico's refinery capacity has not changed. To meet this increased petroleum product demand, Mexico increased product imports, particularly from the United States (Figure 3). Since 2004, U.S. exports of petroleum products to Mexico—primarily motor gasoline and diesel fuel—have nearly tripled.
In addition to upstream changes, Pemex is looking to strengthen its downstream assets and increase refinery capacity. According to trade press, projects are underway to upgrade the Minatitlan and Salamanca refineries and construct a new 250,000-barrel-per-day facility in Tula, called the Bicentennial Refinery. However, analysts do not expect to see a significant increase in refinery capacity until 2017.
The Mexican government subsidizes the cost of motor gasoline using a sliding scale based on inflationary thresholds set by Mexico's Secretariat of Finance and Public Credit (SHCP). As global gasoline prices rise, the cost of this subsidy increases for Pemex, and therefore reduces capital available for investing in exploration and development of crude oil or upgrading refinery capacity. Because the full gasoline cost increase is not passed along to consumers at the pump, the demand response to higher world product prices is attenuated.
President Enrique Peña Nieto, who took office December 1, 2012, and who has pursued reform in several sectors, including education and telecommunications, is now weighing measures that could potentially open the oil and gas sector to foreign investment. His formal proposal is not expected to be released until after state-level elections take place this July, and is likely to focus on the upstream sector. However, should President Peña Nieto decide to make changes in the downstream sector by reducing or eliminating gasoline subsidies or by investing in refining capacity, the impetus for recent growth in supply of petroleum products from the United States may be substantially lessened, which could have significant implications for U.S. refining.
Gasoline price increases while diesel fuel price continues to decrease
The U.S. average retail price of regular gasoline increased two cents to $3.54 per gallon as of May 6, 2013, down 25 cents from last year at this time. Prices increased in all regions of the nation except the East Coast, where the price decreased a penny to $3.45 per gallon. The largest increase came in the Midwest, where the price is up five cents to $3.61 per gallon. The Rocky Mountain and West Coast prices both increased one cent, to $3.49 per gallon and $3.81 per gallon, respectively. Rounding out the regions, the Gulf Coast price went up less than a penny to remain at $3.30 per gallon.
The national average diesel fuel price decreased one cent to $3.85 per gallon, 21 cents lower than last year at this time. The average price has now fallen 31 cents in 10 consecutive weeks of decline since peaking on February 25. Prices were down in all regions of the nation except the Midwest, where the price increased three cents to $3.87 per gallon. The largest decrease came on the West Coast where the price is $3.92 per gallon, a drop of three cents from last week. The East Coast price is $3.86 per gallon and the Gulf Coast price is $3.74 per gallon, both lower than last week by two cents. Rounding out the regions, the Rocky Mountain price decreased a penny to $3.80 per gallon.