Rising gas prices are causing some Californians to head to the border. Photo: Thomas Hawk (flickr)

Rising gas prices are driving Californians to fill up in Mexico, according to the Wall Street Journal.

Gas is approaching $5 a gallon in San Diego — twice as much as it is in neighboring Tijuana. Many Californians not only filling up in Mexico, they're even installing extra-large fuel tanks in pickups and work vehicles for later use, often bringing back enough to sell in California for a large profit.

Suppliers of fuel tanks and San Diego auto shops are happy at the phenomenal business. For example, fuel tank company Transfer Flow made more than half a million dollars in May alone.

But many Mexicans are unhappy about the “gringo invasion," which has meant long lines at gas stations and diesel shortages. This week, the number of Tijuana stations offering diesel dropped significantly. Many stations are beginning to refuse to serve Americans.

Historically Pemex, the Mexican state oil monopoly, set gas prices along the border within a few cents of U.S. prices, deterring motorists from comparison shopping. But as gas prices have shot up in the U.S., Mexico has kept its prices down with massive government subsidies to keep gas affordable for Mexican citizens. But these subsidies are causing problems for the government's budget. In fact, an additional $20 billion dollar subsidy was added to the Mexican federal budget as an emergency measure in May, as part of an effort bolster the economy.

And because Mexico doesn’t have the refinery capacity to turn their own oil into gasoline, it imports a large percentage of its gas from the U.S.. So by subsidizing the fuel — and then reselling it to U.S. citizens at cheap rates — the Mexican government is losing money any way you look at it.

Today, Business Week takes a look at how Mexico is benefiting under Nafta -- but why the free trade agreement hasn't solved all of Mexico's economic woes.

There's no question that the country has benefited greatly from Nafta: Mexico has become the world's 15th-largest exporter, sending abroad $272 billion of merchandise in 2007 ($43 billion of which was oil). It transformed a $3 billion trade deficit with the U.S. in 1993 into a $75 billion surplus in 2007. Mexico went on to sign free-trade agreements with 41 other countries, attracting some $223 billion of foreign investment in 15 years.

So, why did tens of thousands of angry Mexican farmers take to the streets in late January, demanding that Nafta be renegotiated? Because after a decade and a half of free trade, Mexico's economic transformation is incomplete, and many Mexicans are blaming Nafta for a plethora of problems that have more to do with bad government policies than with free trade.