Loosening of Mexico's Gasoline Prices Draws Heat

Vehicles drive past the new Hidrosina gas station in Mexico City on June 14, 2016. Hidrosina is Mexico's first gas station brand to break from the state-owned Petroleos Mexicanos monopoly. ENLARGE
Vehicles drive past the new Hidrosina gas station in Mexico City on June 14, 2016. Hidrosina is Mexico’s first gas station brand to break from the state-owned Petroleos Mexicanos monopoly. Photo: Bloomberg News

MEXICO CITY—Mexico is moving to end eight decades of government-controlled gasoline prices, a step that will lead to a big jump in prices at the pump and could prompt a backlash against the government’s efforts to liberalize the country’s energy market.

Price controls for gasoline will be scrapped in late March in parts of the country that border the U.S., where motorists are more accustomed to competition among gasoline stations, regulators said Wednesday.

Other regions will gradually follow suit during the year—including Mexico City in November. The last to make the switch will be southern areas of the country where a lack of gasoline stations could lead to price gouging.

Mexico’s main gasoline trade group Onexpo is expecting prices to jump around 15% next year, mainly due to higher oil prices and a weak peso. Others see increases of more than 20%.

“Twenty-Seventeen will be a year of transition,” said Energy Minister Pedro Joaquín Coldwell. “The model of controlled prices will gradually die.”

Higher gasoline prices could undermine the confidence among Mexicans in an overhaul of energy laws in 2013 that ended state oil company Petróleos Mexicanos’s monopoly on exploration and production, refining, and fuel imports.

“The government needs to tread lightly. The price of gasoline is a very sensitive one, and we cannot rule out social outbreaks in some poor regions,” said Adán García, a public policy expert with the Center of Economic and Budget Research, a local public policy advocacy group.

The flagship economic overhaul of President Enrique Peña Nieto is already viewed negatively by 56% of Mexicans, according to a survey conducted by local pollster Parametría earlier this year.

Without government subsidies, regular gasoline in December would have cost 11% more than the 13.98 pesos per liter, or $ 2.60 per gallon, price set by the government, according to Mexico’s antitrust agency.

A weaker Mexican peso, which has fallen about 16% against the U.S. dollar in the past year, adds pressure to the price since Mexico imports more than half the gasoline it consumes, most of that from the U.S.

Higher gasoline prices may also stir inflation, putting pressure on the central bank to raise interest rates further.

Mexicans have started to see the first non-Pemex gasoline stations in decades, with private operators offering more services like convenience stores and cleaner restrooms. They are also advertising the price in dazzling banners alongside the logos—a novelty in Mexico.

But higher prices at the pump could sour many on the experience. Mexico is freeing up its prices at a time when international oil prices are rising.

“All this could be a good thing if the people see some benefit when oil prices go down,” said Rogelio Ventura, a truck driver in Mexico City. “If not, this will only be a bad joke.”

There are also concerns the state monopoly could be replaced by private ones in parts of the country with few gasoline stations. Earlier this year, the antitrust commission opened an inquiry into possible monopolistic practices—such as dividing up a market among competitors—in gas stations in the border state of Baja California.

Mexico has just around 11,400 gas stations, or nine per 100,000 people compared with 36 per 100,000 in the U.S. About a third of them are concentrated in the six largest states.

Authorities say they’re confident the freeing of prices will ultimately benefit consumers through greater competition between gasoline stations.

“Competition won’t come by decree,” said Alejandra Palacios, the head of the antitrust commission. “The country still has to work on several fronts to have more chance of success in the shift from a monopolistic, integrated energy sector to one based on competition.”

After more than 75 years controlling all upstream and downstream oil activities, Pemex owns the entire fuel distribution infrastructure which new suppliers will be able to use at nondiscriminatory prices to move their gasoline.

But that infrastructure is limited—Mexican ports have a combined 10.6 million barrels of fuel storage capacity, less than that of a single company operating in the port of Houston, Texas—and that could curb the potential for lower prices at the pump.

Write to Juan Montes at juan.montes@wsj.com

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