The production of all the gasoline a country consumes is not efficient – Tech Viral Tips

Chief Economist of BBVA Mexico

Last month the government announced its intention to halt oil exports by 2023 and instead use it in a national refining of gasoline aimed at achieving “energy autonomy” and curbing gasoline imports. It is argued that, being an oil producer, Mexico should not import an oil derivative.

Neither in economic theory nor in empirical evidence is there any element to suggest that the output of one input represents any kind of comparative advantage over the production of the final product. The opposite happens all the time in the modern global economy. The United States sells aluminum and steel to Japan, which uses them to produce automobiles, a large portion of which is exported to the United States. Canada exports dairy to the United States where it is used to produce processed foods that are exported back to Canada. Many coffee producing countries sell it to countries that have a comparative advantage in roasting or distribution so that the final product can be produced there and sold to global consumers.

International trade is guided by the concept of comparative advantage. Under conditions of competition, the country or region or company that can produce more efficiently relative to others must produce it. And this translates into economic benefits for the exporters and importers. It is more efficient to obtain a product from another country, where it is produced at a lower cost, including import costs, than to produce it domestically.

Oil extraction and refining are different economic activities. Being proficient in one does not necessarily mean being proficient in the other. Mexico is relatively efficient in extraction, but very inefficient in gasoline production. Pemex Industrial Transformation’s main activity is refining with huge amounts of money lost: 62 billion pesos in 2018 – about 2.6 percent of GDP – and 72,000 in 2019 – 2.9 percent of GDP -; 232 billion in 2020, an unusual year due to the pandemic crisis (but which accounts for the risks of activity sensitive to international oil prices). Today, producing gasoline in Mexico means losing money.

However, the fact that there is no competitive advantage in refining gasoline or any other product, especially if it represents greater added value, does not mean that it is not desirable, but it would not be by decree. A lot of money would have to be invested in restructuring refineries, which faces uncertainty about how quickly demand for combustion cars will drop. It should be borne in mind that Pemex has been trying to become competitive in refining for decades without any success. Furthermore, it is a risk that the government should not run, which also lacks the necessary financial space to make the necessary investments.

As long as its refineries maintain their current status and continue to face heavy labor costs, Pemex will be unable to refinish; The foregoing given its limited potential production even after Dos Bocas entered operation; The best thing for the country would be not to produce a drop of gasoline. It would be more efficient to buy it in the USA. With the money saved, a lot can be done in terms of social spending and infrastructure. And if you fear shortages, you can invest in storage capacity to guarantee inventory for a short period of time, given that gasoline is an easy product to import from many countries. Continuing to produce gasoline here inevitably and inevitably implies having more expensive gasoline. It will be paid by the consumers or the taxpayers. there is no other.

As if that weren’t enough, producing gasoline in Mexico is not only more expensive, but also much more polluting, due to the poor condition of refineries, so following the strategy proposed by the government would deter Mexicans’ health. On the other hand, the fuel oil produced by the refining process of Mexican crude is so polluting that no one in the world is willing to buy it except CFE which produces electricity with processes that in turn are more polluting. Stop exporting oil and produce all the gasoline demanded here, which would result in huge economic losses, an environmental disaster, a definite violation of Mexico’s international commitments on public health and sustainability.