Do you know why the price of gasoline went down? An expert explains

International oil prices have fallen since March 9 of this year, leading to a devaluation in the price of gasoline in Mexico.

In an interview with CONECTA, Héctor Magaña, who teaches Accounting and Finance at the Tecnológico de Monterrey Business School on its State of Mexico campus, explains what happened.

The price of fuel went down due to an international meeting held between the member countries of the Organization of the Petroleum Exporting Countries (OPEC) and Russia.

Magaña explains that the objective of this meeting was to reduce oil production and thus deal with reduced demand for oil due to the effects of COVID-19.

“However, Russia thought that this reduction in production would work against its interests and favor private oil companies, mainly American ones, so it decided to increase production.

“This in turn caused Saudi Arabia to react by increasing its production. Therefore, by increasing the supply of oil, its price has tended to go down, along with that of all its derivate products, particularly that of gasoline,” he explained.

This turn of events has affected Mexico to such an extent that some gas stations in certain states have begun selling liters for under 20 pesos.

“Those continuing to sell at unadjusted prices argue that they haven’t considered reducing prices because their tanks still contain gasoline that was bought at a “regular” price.

“Once they need to resupply, they may negotiate with the new prices and thus offer cheaper liters of gasoline to the public,” said Magaña.

As to whether gas prices will fall even further in Mexico, the professor said that this drop will be gradual, as everything depends on international oil prices.

“It’s important to note that this drop in prices will be gradual and may be adjusted depending on the level reached by international oil prices.

“If the dispute between Russia and Saudi Arabia can be resolved in the short term, it’s likely that oil prices will go up again. However, if the conflict continues without resolution, we could see low prices for gasoline for the next few months at least,” he explained.

Regarding the current situation in Mexico due to the COVID-19 pandemic, the Business School professor explains that there’s likely to be reduced demand for gasoline despite the low prices.

“The demand for gasoline could be lower as it’s necessary to take more severe measures to deal with the health problem caused by COVID-19. More people could be encouraged to work from home or avoid moving around on crowded means of transportation.

“This not only reduces the demand for fuel of those who have private automobiles, but also of public transport and taxi services,” he said.

In order to stabilize the country’s economy, the Mexican government has decided to increase collection of the Special Tax on Production and Services (Impuesto Especial sobre Producción y Servicios, IEPS).

“What was reduced was the fiscal incentive on that tax so that the government could increase its income through the sale of fuel.

“This was because 25 to 30% of federal income comes from the sale of hydrocarbons. If oil prices continued to go down, the government’s resources would be reduced,” he explained.

Finally, the professor shared some advice on what we should do in this type of situation.

“Regarding the consumption of gasoline, I believe that it would be best to consume as normal and take advantage of the savings obtained from consuming cheaper gasoline by investing them or using them for emergencies.

“We should remember that gas prices aren’t fixed, but the oil war between Russia and Saudi Arabia will keep oil prices low, making gas prices cheaper in the short term,” he concluded.

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