Recovering sovereignty over oil is the key objective of Mexico’s hydrocarbons policy, says president Andrés Manuel López Obrador. To start with, it is a fallacy, because sovereignty was never lost. The nation always conserves control over the way in which its natural resources are exploited. The government’s task should be to attract investment into the industry, whether it be through state-run or private companies, charging duties and taxes which strengthen public revenues and contribute to economic development.
The President looks upon state-run Petróleos Mexicanos (Pemex), above all, as a national symbol, which is why he worships it. But when it comes to dealing with the fall in oil production, the company’s finances and fighting corruption and illegal fuel imports, results in his administration have been scarce. He is rebuilding the monopoly of the state-run company and, in a show of pure authoritarianism, now he proposes a reform bill to the Hydrocarbons Law which would revoke permits of gasoline station owners and could confiscate their premises arbitrarily.
On March 18th, López Obrador set out his objectives for the oil industry. He brought down the goal for crude oil production during his government from 2.6 million to 2.0 million barrels per day, a figure that is still ambitious, given that output continues to fall and stands at 1.65 million barrels per day currently. He proposed not producing more oil than is needed for meeting demand in the domestic market. All output, he said, will be refined inside the country, there will be no exports of crude oil and, at the same time, Mexico will cease to import fuels. We will be self-sufficient in year 2024, he said.
But the numbers just don’t square. To meet demand in the Mexican domestic market, there is no need to produce 2 million barrels per day. One million would be enough, assuming it would be processed in efficient refining plants which we do not have. The six state-run refineries can only produce a third of the gasoline and diesel that are consumed domestically and in the process they produce massive amounts of heavy fuel oil, a polluting residual fuel which is practically impossible to sell –state-run power company CFE being the only client– and which racks up enormous losses. The refineries would have to double or almost triple fuel production in order to process all of Mexico’s crude oil output, but they are obsolete and it would be extremely costly and it would take many years to modernize them.
In an optimistic scenario, when the new Dos Bocas refinery, currently under construction, goes into operation, the seven refineries would only just be able to process slightly more than half of the 2 million barrels, which is the daily crude oil output goal, and the objective of no longer importing fuels would still be far away.
A million barrels of crude oil per day are currently exported, that is, almost two of every three barrels produced. If crude oil were no longer to be exported, vital revenue for paying Pemex’s debts and operations would be lost.
López Obrador announces goals with no technical nor economic foundation. He does not heed the logic of promoting joint ventures between Pemex and private firms to create investment or of importing light crude oil to maximize efficiencies at refineries and thus be able to produce more gasoline and less heavy fuel oil.
Common sense does not apply. The often-preached self-sufficiency is just not feasible in practice, at least in the foreseeable future. Given a wrong diagnosis, operating problems just get worse. Soon, the Finance Ministry will take on part of Pemex’s liabilities as sovereign debt, which will weaken the country’s finances.
Add to this the new reform proposal for the Hydrocarbons Law. If it goes into force, the government will intervene and will be able to operate private facilities –but it will not be an expropriation, the President says–. It will frighten investors away and it will cause an avalanche of litigation, as well as uncertainty in the fuels market, which will heighten the risk of fuel shortages. Wouldn’t it be easier to combat illegal imports by applying the strict laws that already exist? They should try it.
López Obrador’s oil policy is incoherent. Is his real goal to be seen in history books alongside General Lázaro Cárdenas del Río, who nationalized the oil industry? If so, that is a real sovereign joke!