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  HOME | Mexico

Oil Price Plunge Forcing Mexican Government to Rethink Energy Strategy

MEXICO CITY – The Mexican government will have to rethink its energy strategy given the recent plunge in the price of oil, since almost a fifth of its budget – 17.9 percent – depends on petroleum income and what it can collect at the reduced price is not enough to meet its budgetary needs, experts consulted by EFE warned on Wednesday.

Although the experts agreed that “no country was prepared” for the latest crude oil price war, they said that the crisis comes at a time of vulnerability for Mexico, where in 2019 the GDP contracted by 0.1 percent and Petroleos Mexicanos (Pemex) reported a net loss of $18.367 billion, almost double its loss in 2018.

“According to logic, what most suits Pemex and Mexico is for Pemex to reduce the losses as much as possible. At these prices, it cannot sustain … the level of production it had planned for, which in any event was seen as complicated,” said Rosanety Barrios, an energy analyst.

Last Monday, the price of Mexican crude plunged 31 percent to $24.34 per barrel from $35.75 per barrel on the previous day, although on Tuesday it recovered slightly, closing at $27.40 per barrel.

If this situation of “excessive volatility” continues, Barrios said that Mexico could lose up to half its oil income and this would affect almost 10 percent of the country’s budget, meaning that cuts in public spending would become necessary.

In light of this situation, she said she regretted that the current administration has once again increased the government’s dependence on Pemex, the world’s most indebted oil giant, which should lower its costs in the sectors that are causing the most losses, like exploration and refining.

“In addition, we didn’t have the petroleum negotiating rounds that would have permitted some kind of (private) income for the state and, I’m saying, diversification is the recommended strategy to reduce the risk. Today, we don’t have that,” Barrios said.

Claiming that the government has created a certain amount of economic “armoring,” the Treasury and Public Credit Secretariat (SCHP) reported on Tuesday that this year it invested $1.15 billion in an unspecified insurance product to cover Mexican crude at a price of $49 per barrel.

“We had already been preparing a strategy, thinking primarily about the (economic) deceleration and the effect of the coronavirus, which is equally valid now that we have the petroleum shock,” said SCHP chief Arturo Herrera at a press conference.

Although Herrera refused to go into the details of the move, Ombudsman Energia Mexico director Paul Alejandro Sanchez estimates that this insurance product hedges or protects between 30 and 50 percent of Pemex production, a figure that “does not save” public finances.

“No, because there’s a cash flow that will not be able to be recovered. What does that mean? It means that the coverage is paid through the end of the year and right now there’s going to be a problem because petroleum is not going to be sold at a high price to be able to maintain, not only the finances of Pemex, but also the federal government’s transfers,” he said.

Despite the fact that oil income now represents just 4 percent of the Mexican GDP, instead of the 8 percent it represented in past decades, Sanchez said that “it’s still not possible to say that the non-dependence (situation) has improved” in the sector.

“The problem is that a large part of the current spending of this administration, that is, all that is being used for stipends, for direct support social programs and all that, depends in large part on petroleum income. It’s always been seen as a checkbook,” he said.

He also predicted that the uncertainty over the situation will continue because it goes beyond the oil price war being waged between Saudi Arabia and Russia, since the world oil market has an oversupply and there is falling demand.

Due to this mixture of internal and external factors, Sanchez argued, Mexico is at risk of suffering a reduction in its credit rating, something that Moody’s and Standard & Poors – both credit rating agencies – have warned about.

“Not only the debt of Pemex, but also sovereign debt. That is, (the risk is whether) the country’s going to have enough resources to make the payments it has to make to fulfill its international commitments,” he said.

 

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