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The escalating cost of natural gas has prompted two Senate committees to seek legislation to set a ceiling on domestic prices. In a resolution introduced in mid-December, the Senate committees dealing with finance (Comision de Hacienda) and energy (Comision de Energeticos) approved legislation to set a ceiling of US$3.90 per million BTUs (British Thermal Units) on domestic prices.

Natural-gas prices have been increasing steadily in recent weeks and are soon expected to reach US$8.00 per million BTUs on international markets, the Secretaria de Energia (SE) said recently.

The legislation to establish a national ceiling for domestic gas prices was introduced by committee chairs Sens. Fauzi Hamdan and Juan Jose Rodriguez Prats of the governing center-right Partido Accion Nacional (PAN), but it also received strong endorsements from the opposition Partido Revolucionario Institucional (PRI) and Partido de la Revolucion Democratica (PRD).

Bill would remove link between Mexican prices and US market

The proposal would establish a "Mexico-only" price for natural gas, rather than linking domestic prices with those in the US market.

Alejandro Elizondo, president of the Camara Nacional de la Industria y el Acero (Canacero), has strongly endorsed the proposal, saying natural-gas prices in Mexico are so high because they are tied to the prices quoted in the South Texas market.

Some analysts agree that linking the Mexican natural-gas market to prices quoted for South Texas is unfair to the Mexican industry.

"All kinds of distortions in the US market are thrust upon Mexico, despite the lack of real integration," said David Shields, an energy expert whose column is published in the daily newspaper The News and the weekly news magazine Siempre.

But Shields said the Mexico-only price option would imply a major subsidy to several dozen major users of natural gas in Mexico.

"Subsidizing inputs for Mexican companies would bring up all kinds of contentious, protectionist trade issues under the North American Free Trade Agreement (NAFTA) and might send a bad signal regarding Mexico's intentions on free trade," Shields said.

By offering a subsidy, the government would also be admitting that the Mexican and US natural-gas markets are not really integrated. "There are no privately owned cross-border pipelines, and there is no trading of gas by private companies between the two countries," said Shields.

Energy Secretary Ernesto Martens is expected to review the initiative, with input also expected from Dionisio Perez Jacome, director of the Comision Reguladora de Energia (CRE). But Martens has already ruled out any direct subsidy to the Mexican business sector. "The country has other needs, so it is impossible to offer businesses this type of subsidy," Martens told reporters in mid-December.

Some signs suggest that the administration of President Vicente Fox is considering at least some form of the Mexico- only scheme. On Dec. 19, the SE announced an agreement with business organizations in Nuevo Leon state to establish a ceiling for gas prices in that state at US$3.50 to US$4.00 per million BTUs for a period of four months.

Meanwhile, Martens said the Fox administration is expected to announce a scheme by the end of the year to help private companies cope with the escalating price of natural gas.

High gas costs force some companies to reduce operations

Many companies involved in the manufacture of steel, glass, processed food, and other products have already shut down some or all of their operations this year because of the high cost of natural gas (see SourceMex, 2000-09-27).

High energy costs are also affecting other industries like construction that are having to pay higher prices for cement, ceramic tile, and other materials because these have become more costly to manufacture.

In early November, the organization that represents the manufacturing industry (Camara Nacional de la Industria de Transformacion, CANACINTRA) warned of an "imminent collapse" of the Mexican economy because of high prices for natural gas and other fuels.

CANACINTRA based its assessment on a survey conducted among its member companies. Of the respondents, 42% cited the possibility of reducing their work force in the short term to balance their books, while another 38% said they planned to delay new investments or expansions.

"We are talking about the possible loss of 88,000 direct jobs and 44,000 indirect jobs," said CANACINTRA. "In addition, there is a real risk that 210 companies will have to go out of business altogether."

As a short-term solution, some companies have already told employees they will not be able to give the traditional Christmas bonus this year. Others have delayed indefinitely the construction of capital-intensive projects like power- generating plants.

The Fox administration has proposed to solve the problem in the long term by expanding domestic supplies of natural gas.

Miguel Garcia, an energy-industry expert at Colegio de Mexico, said the state-run oil company PEMEX should develop technology to recover the natural-gas supplies that are burned during the extraction of oil in the Gulf of Mexico.

"It is not right for businesses to pay more than US$5.00 per million BTUs for natural gas, when PEMEX could be producing the same amount at slightly more than US$2.00," said Garcia.

The Fox administration is also under pressure to ease the cost of heating oil for domestic consumers. The price of liquefied petroleum gas (LP gas), still used for heating and cooking in some parts of Mexico, has increased by about 40% this year. This fuel is used widely in Mexico City, which is still undergoing the conversion to natural gas.

The increase in the cost of LP gas, although much smaller than the 150% rise in natural gas, has created hardships for many low-income families. A study released by the country's top consumer-protection organization (Asociacion Mexicana de Estudios para la Defensa del Consumider, AMEDEC) said that more than 19.7 million families in Mexico must spend one-third of their income to acquire LP gas.

Javier Estrada, a CRE commissioner, said government intervention has slowed the increase in the cost of LP gas in recent weeks. Prices would have increased by 60% to 70% without government subsidies. "The price of LP gas is 20% cheaper in Mexico than in the spot market," said Estrada.

The government has also taken steps to increase supplies of other types of fuel in Mexico. In mid-December, PEMEX announced plans to double butane and propane imports to cover winter demand. The increased imports will remain in effect until March, when weather conditions moderate and demand begins to fall.

Government creates fund from excess oil-export revenues

While prices are higher for domestic fuel, the general increase in global prices for hydrocarbons has provided Mexico with strong revenues from exports of crude oil. Mexico's petroleum-related revenues totaled 306.77 billion pesos (US$32.53 billion) in January-September, an increase of almost 28% from the same nine-month period in 1999.

The administration of former President Ernesto Zedillo used the surplus revenues to pay down public liabilities and to create a special fund to act as a cushion against extreme fluctuations in global oil prices.

Carlos Noriega, deputy finance secretary under Zedillo, said the fund was created as a safety net for the government to fall back on if oil prices should decline below US$18 per barrel for a sustained period. The Zedillo and Fox administrations used US$18 per barrel as a guideline to draft the 2001 budget.

Oil prices have averaged US$23 per barrel in 2000 but are expected to decline gradually during the next several months. Prices were already hovering slightly above US$18 per barrel in mid-December.

"We have to watch oil prices very carefully because they could continue to decline in the next few days," said Merrill Lynch analyst Pablo Riveroll.

The creation of the fund, which totaled 10 billion pesos (US$1.06 billion) as of mid-December, was mandated by the Mexican Congress almost a year ago, although the rules for its operation have not been defined. [Note: Peso-dollar conversions in this article are based on the Interbank rate in effect on Dec. 20, reported at 9.43 pesos per US$1.00] (Sources: Ocho Columnas (Guadalajara), 11/03/00; Reuters, 11/07/00; El Informador (Guadalajara), 11/21/00; The News, 11/01/00, 11/08/00, 11/17/00, 12/13/00; El Financiero, 11/01/00, 11/03/00, 11/16/00, 11/21/00, 12/14/00, 12/15/00, 12/19/00; Reforma, 11/01/00, 12/14/00, 12/15/00, 12/19/00; Novedades, 11/06/00, 11/16/00, 11/29/00, 12/15/00, 12/19/00; El Universal, 11/01/00, 11/02/00, 11/08/00, 11/16/00, 11/21/00, 11/22/00, 12/14/00, 12/15/00, 12/18/00, 12/20/00; El Economista, 11/02/00, 11/03/00, 11/08/00, 11/22/00, 12/04/00, 12/13/00, 12/15/00, 12/19/00, 12/20/00; Excelsior, 11/16/00, 12/15/00, 12/19/00, 12/20/00; La Jornada, 11/16/00, 11/29/00, 12/15/00, 12/18/00, 12/20/00)
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Publication:SourceMex Economic News & Analysis on Mexico
Date:Dec 20, 2000

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