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Should You Buy Diesel in Tijuana?

— The fact that diesel fuel prices in San Diego are now as low as they've been for a while does not allay Michael Morgan's anxiety. Morgan owns AFM Transportation, a trucking company in Point Loma. He is chairman of the San Diego/Imperial section of the Sacramento-based California Trucking Association (CTA), an organization of small and medium trucking companies.

Morgan is angry that trucks coming into California from Mexico -- around 2000 daily at the Otay Mesa crossing -- are engaging in "unfair competition," because his counterparts south of the border pay less in wages and benefits and because they buy cheaper diesel fuel.

Diesel is selling for about 20 cents a gallon less in Tijuana than in San Diego, but in the past year it has been as much as 50 cents cheaper. Should U.S. fuel prices rise again, or should the peso slide, the price variance could widen. What galls Morgan is that the diesel fuel being sold in the border towns of Baja is, he's convinced, coming from California oil companies.

The trucking association is opposed to that part of the NAFTA agreement that would permit Mexican trucks to travel California (and, ultimately, the entire country) without the U.S. companies immediately being allowed to do business in Mexico. Because of political pressure and the strong opposition of the Teamster's Union, that section of NAFTA that allows Mexican trucks access to all of California has been on hold since December 1995; however, Mexican trucks can travel some 25 miles into the U.S. border states, as they've been permitted to do for years.

"A tractor with a dual set of 400-gallon saddle tanks can run the length of California without refueling," says Morgan. While the Mexican government has been pressing the U.S. to open the border states to their trucking, Morgan claims that the current 25-mile limit is still being violated. "U.S. companies with Interstate Commerce Commission certificates lease the Mexican trucks and the drivers. They don't need green cards because they're not paid in this country. The company on this side of the border pays the Mexican company in Mexico. With that permit, the Mexican trucks can run anywhere in the United States."

Morgan states that because of the diesel-costs issue and because company expenses such as Workers' Compensation don't exist for Mexican truck drivers, his members are opposed to spending money on road improvements near the border, "when the primary users of these roads will be people who don't pay a penny of tax in this state." And because of the difference in diesel prices, "our own oil companies are fueling this problem."

The trucking association has been fretting about the cost of diesel fuel (cheaper than gasoline until this decade) since 1993, when California law mandated refineries produce and market in this state only a super-clean, low-aromatics vehicular diesel fuel. The process is regulated by the California Air Resources Board, or CARB, and the clean fuel is known as "CARB diesel." The older diesel fuel, still sold in all other states, is called "national" or "EPA diesel." (The gasoline version of this clean fuel was introduced in California in 1996.)

According to Stephanie Williams, an environmental scientist who also acts as spokeswoman for the CTA, tests done by her association showed that some CARB diesel was being shipped to Nevada and Arizona and sold there for a lower price than in California. In terms of costs, this allows trucks that enter California after fueling up in those states a competitive edge.

Last year, just before a conference attended by trucking companies, oil companies, and state and federal environmental agencies, Williams sent 15 truck drivers into Tijuana, Mexicali, and Rosarito to collect diesel samples at Pemex stations, the retail outlets for the Mexican petroleum company (Petróleos Mexicanos) owned by the Mexican government. Her intention was to contrast the difference between the "dirty fuel" coming from Pemex stations and that of the more costly diesel in California.

Williams invited representatives of Pemex to this conference, offering to pay travel expenses. She said she received promises from some Pemex executives to attend, "but then their public affairs guy said, 'Don't call here anymore. We don't want to get involved.' "

The CTA sent the nine good samples of Pemex diesel to core Laboratories in Los Angeles for testing. Williams says the lab report showed that "the fuel sold in Mexico is exactly like the fuel sold in California." In other words, CARB diesel.

For the trucking association, it was no longer a question of Mexican trucks fouling California air, but of unfair competition from below the border.

Industry sources say that the main producers of diesel fuel in California are Chevron, Tosco (the company that owns unocal and Arco. A spokesman for the latter, reached by phone, said that his company had a contract with Pemex to supply the Rosarito facility with premium gasoline, but not diesel. Pemex, he said, "comes to the San Diego distribution terminal [the pipeline and storage tanks in Mission Valley] to pick up and sell it in Mexico." The price that Arco sold it for was proprietary information, he stated. He did acknowledge that the am/pm mini-markets that now attach to the newer Pemex stations in Baja are operated by an Arco subsidiary.

Last June, Tosco never returned calls inquiring about the matter, and a Chevron spokesman, while noting the absence of a pipeline from Mexico's interior to Baja, said he knew nothing about any diesel sales to Pemex in Rosarito.

Francisco de la Garza Andrade, the superintendent of the Pemex facility, acknowledged that all the premium gasoline sold by Pemex stations in Baja came from California, as well as some of the regular gas. But Pemex did not import diesel fuel, he said. "The diesel we are selling is Mexican diesel. It's of good quality."

While the matter rested there, the trucking association, over a period of six months, collected seven more samples of diesel fuel from Tijuana and vicinity, at different stations and on different days. Once again the independent petroleum testing lab in Los Angeles reported results that people in the industry said were consistent with being CARB diesel, not EPA and not likely even a blend. (Some in the California petroleum business, such as jobbers who distribute the fuel to retail stations and critics of the industry, believe that California refiners regularly export a blend of CARB and EPA diesel fuel, or that they produce and export a lot of "off-spec" fuel, supposedly due to mistakes during the refining process.) But no one from big oil or the Mexican petroleum bureaucracy was publicly admitting to anything.

Tom Glaviano is a fuels analyst at the California Energy Commission, the state agency that monitors production and inventories of energy sources. When initially contacted this January, Glaviano said that Chevron was supplying Pemex in Rosarito with vehicular diesel fuel; he had a copy of the specifications sheet that Pemex had sent to Chevron. Glaviano offered to ask around to determine the nature of the contract and to find out if any other company was shipping diesel to Baja.

Shortly thereafter, the oil companies began to respond to phone inquiries. Tosco/unocal said that they have sold, on spot market, "some" diesel to Rosarito but declined to discuss prices or quantities. The Chevron spokesman, who last year did not know if his company sold diesel to Mexico, now stated that they "sold some, very little EPA diesel to Pemex in Rosarito on a spot basis." He said that Chevron last year shipped to them, by boat from Los Angeles, over 200,000 barrels of vehicular diesel. He could not divulge prices.

Oil sold on the spot market, Glaviano said, is usually cheaper -- by a few cents or as much as 10 to 15 cents -- than that sold at the rack, or pipeline.

In February Pemex was contacted again. Victor Manuel Pérez, acting superintendent of the Rosarito facility while Francisco de la Garza was on vacation, asserted that only about 15 percent of the gasoline used in Baja came from California (which contradicted de la Garza's earlier statement) and that the imports were due to a strong national demand. But like de la Garza, he insisted that all the diesel fuel sold in Baja was sent up by ship from a refinery in Salina Cruz, in the state of Oaxaca, over 2500 nautical miles from Rosarito (there are no pipelines from the interior to Baja).

Was Pérez aware that the diesel in Baja's Pemex stations tested out as clean as that in California? "It's better than California's," he said. "And cleaner, too."

No one in the industry or knowledgeable about Pemex believes that Mexico has spent what Tom Glaviano says costs $30 to $50 million to retrofit a refinery to produce CARB-quality diesel, an investment that several experts agree is virtually impossible to recoup. A Mexicali-based official of the Mexican equivalent of the EPA said that he had no knowledge that Mexico had retrofitted any refinery to produce CARB-quality diesel fuel.

Although the oil companies would not divulge precise quantities or prices of the fuel they sell to Pemex/Rosarito, information obtained from a division of the U.S. Census Bureau in Washington sheds some light. In 1997, low-sulfur diesel fuel shipped from Los Angeles to Mexico (port not specified) amounted to 574,202 barrels, or 24,116,484 gallons. As the Chevron spokesman pointed out, this is not a large amount, but it would seem to be enough to supply the needs of the five cities in the triangle anchored by Mexicali, Ensenada, and Tijuana, especially if most of the L.A.-to-Rosarito shipments were dropped off in Baja.

The manager of a "very busy" East County diesel station said that she sells 12,000 to 16,000 gallons of diesel fuel a week. There are likely no more than 25 Pemex stations with diesel pumps in the Baja border cities, according to a Pemex station manager. But if each station did an average of 16,000 gallons per week, it would tally out at almost 21 million gallons per year, very close to the figures supplied by the Census Bureau.

Is Mexico "subsidizing" its diesel fuel, as Stephanie Williams believes? Because Pemex is a government-owned monopoly, they can price their product as they see fit. In Baja, the cost of gasoline is higher than that of diesel, the opposite of what prevails in California. Two weeks ago, regular gas in Tijuana sold for about $1.47 a gallon, the price for premium some 14 cents more. Diesel sold for about $1.14. If Pemex is obtaining all its premium gas and diesel fuel from California, it would have to be assumed that they are deliberately pricing their diesel artificially low, or that Chevron is selling their CARB or off-spec diesel to Baja at a very low price, or that Arco is shipping down some very expensive gas.

Census Bureau statistics indicate that the total value of the vehicular diesel sent to Mexico from Los Angeles last year was $12,170,085, which translates to an average of 50 cents per gallon. In Los Angeles, according to figures supplied by Tom Glaviano, the average spot price for all of 1997 for diesel was 68.22 cents per gallon. That would mean that Mexico received California diesel last year for an average of over 18 cents less than it was selling for spot in Los Angeles. Glaviano speculates that it was either bought by Pemex at or near the bottom of the price swings, or that Pemex enjoys a special contract rate from their California suppliers. The Baja pump price last year for diesel was around a dollar a gallon, some 50 cents less than what was being charged in San Diego.

California Energy Commission data shows that the average spot price last year in Los Angeles for regular grade gas (they keep no figures for premium, but it's probably only a few cents more) was 70.33 cents, about 2 cents more than the diesel. Unless Pemex is paying Arco 30 cents a gallon more than they appear to be paying for diesel, it seems they're keeping their diesel prices low by design.

If this is so, the question of "why" arises. As does the question of why Pemex officials in Rosarito are being less than candid.

David Niepert, a Texas attorney and college professor who's done a study of cross-border traffic and legal work for the Mexican government, said that Mexico has long subsidized energy to improve their commercial position. As to the denials of Pemex regarding diesel imports, he "guesses" it's a matter of national pride, "particularly if it means having to admit they have to go to the gringos for oil." (This could be the reason Pemex sends privately owned tanker trucks, mostly from a company called Ponosa, to the San Diego pipeline to pick up the gas.)

The trucking association's Stephanie Williams thinks it's more a matter of economics; it's cheaper for Pemex to get the diesel from L.A. than from the Mexican interior. And, she thinks, they want to use clean-burning diesel "so they don't get shut out of NAFTA" because of environmental objections. Last year, Williams guessed that California diesel was being sold in Baja at 20 cents less than in the state. The companies were willing to sell it cheaper down there "because they have too much of it."

Tim Cohelan, the San Diego attorney who's suing the oil companies for collusion, is of like mind. He claims that Chevron and Tosco act as one company that "operates and produces together." He adds that it is "the practice of California oil companies to export in order to keep the market tight. They don't care if they lose money on these marginal accounts."

And Mike Morgan, the local chairman of the California Trucking Association, thinks there's a conspiracy of silence. "I'm sure there's an understanding [California oil companies have] with Pemex. Think of the uproar over the difference in gas prices between L.A. and San Diego. Imagine what would happen if it were determined that a California oil company was selling diesel to Tijuana, to be sold cheaper than up here."

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