Well, this is really bad luck.
The price of the Mexican oil mix went from US $53 per barrel on December 1, 2018, to US $18 per barrel on March 18th. That’s how markets behave. Sooner or later they implode.
Imagine if during his first year in office President Andrés Manuel López Obrador (AMLO) had accelerated the pace of Mexico’s energy reform which in fact was designed to precisely mitigate two risks: a geological one and an oil price one. Oil reserves are Mexico’s property but thanks to the landmark 2014 energy reform, the Mexican government can now give them away to whoever pays the most. If the winner of a tender miscalculates the geology of the deposit, the Mexican government did not waste its money. If it goes well, the winning private company becomes a partner.
AMLO’s government decided to freeze oil auctions and to inject money into Pemex. But either geology or the company’s execution capacity failed. Pemex oil production fell 8% last year. The company promised on December 2018 that its 20 priority oil fields would be producing a total of 73,000 barrels per day a year later. They ended producing only 6,000 barrels per day.
With the new oil price, the Mexican government, as Pemex’s only shareholder, will lose what it invested in them. Perhaps it should halt production in most of its fields to contain losses. On the other hand, if a private company had won an oil field that later became unprofitable -due to a drop in oil price- that would have been the private company’s problem.
The international price of gasoline has also plummeted. The price of gas that Texas consumers pay is half the price of gasoline what Mexican consumers pay. The Mexican consumer is being milked by the government, which has taken advantage of the fall in gasoline price by increasing the collection of applicable tax.
AMLO’s government and Pemex also have bet Mexican government monies on oil refining. The fall in the price of gasoline around the world is a tragedy for Pemex, as the refining business has become less profitable. Even well-run refineries can lose money in this scenario. Not to mention Pemex’s inefficient oil refineries.
Committing more than US $8 billion of public money to build a new refinery at the Gulf port of Dos Bocas -another key priority of AMLO’s government- is now an even more costly mistake. The project must be canceled. Failure to do so ensures that Pemex’s losses its credit rating.
AMLO’s government has lost its bet on oil, but an even more risky one is underway: it is betting that the coronavirus outbreak will not expand throughout Mexico as much as it has across other countries. AMLO is most likely to lose this bet as well.
* Carlos Elizondo Mayer-Serra is professor at the School of Government and Public Transformation at Tec de Monterrey, in Mexico City. A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @carloselizondom
