Mexico’s state-owned oil company (Pemex) has confirmed once again that it is the weakest link in the country project that President Andrés Manuel López Obrador’s dreams of. The problem goes beyond the US $27.1 billion that the company has lost this year, 2.5% of Mexico’s GDP; despite the fact that Pemex paid US $3.5 billion less in taxes and duties during the second quarter of 2020. Without creative accounting, the real loss would have been US $8.9 billion higher, according to an estimate by energy sector expert Gonzalo Monroy.
Pemex’s debt has now reached US $106 billion, without the benefit of receiving new fresh resources. The increase comes from the company’s refinancing its bond debt at higher rates, reflecting its “junk” credit rating. On top of the above, one should add US $70 billion in contingent labor liabilities, since Pemex did not provision enough reserves to pay for worker retirement pensions. If one adds both concepts, the total debt is equivalent to almost 14% of Mexico’s GDP.
López Obrador and his so-called “Fourth Transformation” movement believe that if Mexico refined all the gasoline it consumes, that would somehow contribute to the country’s sovereignty. They do not acknowledge that their dreadful management of Mexico’s economy will increase public debt by 15 points of GDP this year. This is more than the total growth of public debt during the six years of the Peña Nieto administration. How does being more in debt with the rest of the world make Mexico more sovereign?
I cannot imagine the fairy tales that Rocío Nahle, the Energy Minister, and Octavio Romero, CEO of Pemex, tell López Obrador, but Pemex is broken and the hole gets deeper every day. Pemex threatens not only Mexican public finances, but the stability of the country as a whole. Pemex cannot solve its extremely complex problems by only injecting massive amounts of cash. It would be a bottomless pit. The company requires structural changes that are beyond the capabilities that the Dynamic Duo (Nahle and Romero) have. Pemex would have to renegotiate its labor liabilities, reduce personnel, and focus its resources only on upstream activities (extracting crude oil), leaving midstream and downstream (storage and distribution) in private hands. On the contrary, CFE, Mexico’s state-owned electric utility, would become profitable if it only dedicated itself to commercialization, leaving electricity generation to more efficient private companies.
The Covid-19 pandemic will accelerate the world’s transition to clean energy. This will occur in part due to the drop in demand for fossil fuels, caused by the pandemic, which even brought the price of oil to negative territory, reflecting the huge storage shortages all over the world. But, in addition, the cruel virus reminds us that problems of this type have worsened as a result of out-of-control climate change.
López Obrador’s foolish obstinacy to increase the refining capacity of Pemex -which is now at 635,000 barrels per day- hits Mexico twice. First, the country stops receiving income from exporting crude oil, and instead of importing cheap gasoline we now produce it at a very expensive cost. Mexico’s very inefficient oil refineries are poorly suited to refine the country’s heavy sour crude oil, leading them to produce high quantities of undesirable fuel oil, as a byproduct of the refining process (more or less a third of total output). Faced with the impossibility of getting rid of such a poisonous substance, Mexico now burns it to produce electricity. The cost of doing so is around US $100 dollars per megawatt hour (Mwh), six times the cost of producing it using solar or wind technologies. By the way, producing electricity in Mexico using coal –which benefits López Obrador’s ally Senator Armando Guadiana – costs US $80 per Mwh.
The López Obrador Administration’s oil obsession will kill an industry in which Mexico is globally competitive and which would attract cartloads of foreign investment. Mexico is the third country with the most solar energy potential given its high solar irradiation and the fifth in the world for its wind potential. If Mexico insists on producing expensive and dirty electricity using fuel oil and coal, the government will not only harm the health of Mexicans, but it will kill the competitiveness of our own industry. Moreover, the government will make it impossible that private companies committed to eliminate their carbon footprint establish themselves in Mexico. Pemex will bankrupt the government and obstruct private investment at the same time.
The Covid-19 pandemic has made transparently clear which industries will be the winners in the future. Mexico is not a player in any of them. The pandemic has also made clear which industries have their days numbered. It is precisely in the latter where the López Obrador administration squanders resources that Mexico no longer has.
* Jorge Suárez-Vélez is an economic and political analyst He is the author of The Coming Downturn of the World Economy (Random House 2011). A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @jorgesuarezv