Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20
AMAZON Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 11th Jan 20
Gold Price Reacting to Global Flash Points - 11th Jan 20
Land Rover Discovery Sport 2020 - What You Need to Know Before Buying - 11th Jan 20
Gold Buying Precarious - 11th Jan 20
The Crazy Stock Market Train to Bull Eternity - 11th Jan 20
Gold Gann Angle Update - 10th Jan 20
Gold In Rally Mode Suggests Commitment of Traders (COT) Data - 10th Jan 20
Disney Could Mount Its Biggest Rally in 2020 - 10th Jan 20
How on Earth Can Gold Decline During the U.S. – Iran Crisis? - 10th Jan 20
Getting Your HR Budget in Line - 10th Jan 20
The Fed Protects Gamblers at the Expense of the Economy - 9th Jan 20
Last Chance to Get Microsoft Windows 10 for FREE! - 9th Jan 20
The Stock Market is the Opiate of the Masses - 9th Jan 20
Is The Energy Sector Setting Up Another Great Entry? - 9th Jan 20
The Fed Is Creating a Monster Bubble - 9th Jan 20
If History Repeats, Video Game Stocks Could Soar 600%+ - 9th Jan 20
What to Know Before Buying a Land Rover Discovery Sport in 2020 - 8th Jan 20
Stock Market Forecast 2020 Trend Analysis - 8th Jan 20
Gold Price at Resistance - 8th Jan 20
The Fed Has Quietly Started QE4 - 8th Jan 20
NASDAQ Set to Fall 1000pts Early 2020, and What it Means for Gold Price - 8th Jan 20
Gold 2020 - Financial Analysts and Major Financial Institutions Outlook - 8th Jan 20
Stock Market Trend Review - 8th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Fuel Subsidies In Mexico Stimulate Black Market Activity In The US

Commodities / Crude Oil Jun 27, 2008 - 10:16 AM GMT

By: Joseph_Brusuelas

Commodities Along the frontier between Southern California and Baja California it has always been a tradition for consumers to engage in a bit of arbitrage due to the temporary differences in prices for basic goods. Normally, this has been confined to non-durables and foodstuffs. But, beyond Mexican “cerveza” and other spirits, the changing price of oil has jump-started black market activity north of the border.

While an open secret in California, this activity became national news due to a recent Wall Street Journal article titled “Fill'er Up: Gas Is Cheap In Tijuana, So Californians Buy Big Fuel Tanks.” South of the border, where the Mexican government subsidizes the cost of fuel, the price environment for consumers is quite different. Gasoline costs $2.50 per gallon and the cost of diesel is less at $2.19. What is occurring is more than a temporary way for industrious residents of the border to profit from price differentials. It is a prime example of how government subsidies distort the efficient allocation of goods and services and can lead to a change in consumer behavior.

To the point, due to the near $5.0 per gallon price of gasoline throughout much of California, consumers have incentive to cross the border and purchase gasoline. While, on an individual such activity is no problem and due to the open border an eminently rational endeavor. Yet, if the pricing differentials persist long enough, behavior on the both sides of the border will change.

And that is exactly what has occurred. Residents in San Diego County, California are now doing much more than filling up their tanks. According to the aforementioned article, they are crossing the border with extra-large fuel tanks and returning home with profits in mind. Based on basic price differential, if an individual crosses the border and fills up a 100-gallon tank and returns home, he is in line for a tidy profit. At the subsidized price in Mexico filling up the tank would cost $250.00 dollar as opposed to $475.00 in the US based on an estimate of $4.75 per gallon. If that individual comes home and sells that tank of gas to his neighbors at $4.50 per gallon, he is in line to make a $200.00 profit for just a few hours work. Not bad.

Besides the utter irony of Americans crossing the border to Mexico to find economic opportunity, the real human behavior along the border is instructive regarding the basic economics of pricing. The behavior of US consumers and entrepreneurs is causing supply problems in Baja, California. Supplies of diesel are short and the lack of refinery capacity in Baja has, if you can believe this, Mexico importing refined gasoline from the US!

This state of affairs cannot last for two reasons. First, what economists refer to as “the law of one price,” ensures that in an efficient market all identical goods must have one price. Roughly translated, this means that after a short period of time efficiencies in the market dictate that opportunities to profit will come to a close.

Along the national frontier, the idea of efficient markets does not always hold. Yet, the distortion caused by the fuel subsidies for Mexican consumers cannot last. The logic of efficient markets will cause a change in the structural policies behind the change in individual behavior. Like many other emerging markets, Mexico will soon recognize the folly of its ways and understand that they are not only subsidizing the price of gasoline for their own citizens, but that of rich Americans. Moreover, the longer the price distortions continue to persist, the greater the cost for not only the government of Mexico, but for the citizens of the republic south of the border. In effect, the shortage of diesel and refined gasoline will continue to grow and the state will recognize that paying to import gasoline from the US and the subsidizing the consumption of it by US residents is a losing proposition.

Once that occurs, the current black market of cheap subsidized gasoline in the border region of Southern California will come to an end. But in the meantime, head down to the Ensenada, enjoy the warm summer nights and cold beer. And on the way back, fill up for the week. You will save a few bucks, and remember a time when the inefficient policies of a government actually worked to your favor.

By Joseph Brusuelas
Chief Economist, VP Global Strategy of the Merk Hard Currency Fund

Bridging academic rigor and communications, Joe Brusuelas provides the Merk team with significant experience in advanced research and analysis of macro-economic factors, as well as in identifying how economic trends impact investors.  As Chief Economist and Global Strategist, he is responsible for heading Merk research and analysis and communicating the Merk Perspective to the markets.

Mr. Brusuelas holds an M.A and a B.A. in Political Science from San Diego State and is a PhD candidate at the University of Southern California, Los Angeles.

Before joining Merk, Mr. Brusuelas was the chief US Economist at IDEAglobal in New York.  Before that he spent 8 years in academia as a researcher and lecturer covering themes spanning macro- and microeconomics, money, banking and financial markets.  In addition, he has worked at Citibank/Salomon Smith Barney, First Fidelity Bank and Great Western Investment Management.

© 2008 Merk Investments® LLC
The Merk Hard Currency Fund is managed by Merk Investments, an investment advisory firm that invests with discipline and long-term focus while adapting to changing environments.
Axel Merk, president of Merk Investments, makes all investment decisions for the Merk Hard Currency Fund. Mr. Merk founded Merk Investments AG in Switzerland in 1994; in 2001, he relocated the business to the US where all investment advisory activities are conducted by Merk Investments LLC, a SEC-registered investment adviser.

Merk Investments has since pursued a macro-economic approach to investing, with substantial gold and hard currency exposure.

Merk Investments is making the Merk Hard Currency Fund available to retail investors to allow them to diversify their portfolios and, through the fund, invest in a basket of hard currencies.

Joseph Brusuelas Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules