OREANDA-NEWS. December 28, 2016. Mexican retail fuel prices will increase by 14.2-20.1pc on 1 January under a transitional pricing mechanism leading to full liberalization in 2018, the finance ministry said today.

Maximum prices will average around 15.99 pesos (\\$0.77) per liter for 87-octane Magna gasoline, 17.79 pesos/l for 93-octane Premium gasoline and \\$17.05/l for diesel.

The new pricing formula is based on three elements, adding transparency to the current mechanism, the ministry said. Maximum prices, which will vary across 90 different regions, will reflect state-run Pemex's logistical costs, international reference prices and commercial margins for retail outlets.

The reference prices will be derived from the US Gulf coast, the source of Mexico's growing fuel imports.

At present, the ministry sets maximum prices on a monthly basis using an opaque formula partially tied to international prices, with a 3pc band around 2015 Mexican prices.

"It's an important change that allows us to speak for the first time...of a gasoline market, a market in which we've already shared cost elements, and not of a government that could maintain prices artificially low, or artificially high, according to circumstances," finance secretary Jose Antonio Meade Kuribrena said today.

In December, Magna costs a maximum of 13.98 pesos/l, Premium 14.81 pesos/l and diesel 14.63 pesos/l.

The new pricing formula will be implemented on 1 January and updated on 4 February and 11 February, the ministry said.

Starting on 18 February, maximum prices will be updated every day in each of the 90 regions, until market-driven prices are implemented nationwide.

"In the history of the country, gasoline has almost always – except with a few exceptions last year – gone up and never reflected a lower-price scenario," Meade said. "What we will see now…is that at times gasoline will go up, at times it will go down, following market conditions."

The fuel market opening is among the most politically sensitive and complex aspects of the 2014 energy reform that dismantled Pemex's monopoly. From the government's perspective, the enormous undertaking that kicks off next month should lead to a stable predictable price structure by general elections in July 2018.

The reform established that fuel prices had to be liberalized by 1 January 2018 but the Mexican government decided to move the process forward, extending it over a two-year transitional period.

In 2015, a unique national fuel price was replaced by the current maximum pricing system. In the regions near the US border, the government keeps prices lower to reduce a gap with lower prices in the US, in order to encourage Mexicans to fill their tanks locally. A fixed fuel import tax, known as the IEPS, was introduced in 2016. Both were maintained in the ministry's new system. The IEPS is especially controversial because it has effectively undermined the economics of fuel imports by companies other than Pemex.

As announced earlier this month, the gradual and regional liberalization of prices will begin in the northern border states of Baja California and Sonora on 30 March, after Pemex inaugurates its first open season for fuel pipelines and storage terminals on 15 February.

Other northern border states will be next, followed by Baja California Sur, Durango and Sinaloa, then most of the rest of the country, and ending with the states of the Yucatan peninsula in December.

Mexico's energy regulator CRE and competition watchdog COFECE will maintain some control in the event of significant price gaps that could create supply distortions.

One unintended consequence of the impending price adjustment is panic buying. As of yesterday, Pemex had identified San Luis Potosi, Zacatecas, Guanajuato and Michoacan as critical states with low inventories and shortages.

"We are seeing panic buying even though we still have products in the terminals. In San Luis Potosi, demand went up by 20pc to 40pc," Pemex downstream director Carlos Murrieta Cummings said yesterday in a radio interview.

Another contributing factor to fuel shortages, Murrieta says, is illegal oil tapping, which can lead to the shutting down of pipelines for up to eight hours.

Pemex says it frequently replenishes inventories and monitors for shortages, using alternative transport when oil pipelines are down, such as trucks and railways.