It is ironic that state-run oil company Petróleos Mexicanos (Pemex) should accuse Moody’s ratings agency of having downgraded it unfairly, when the government, sadly, has mistreated and discouraged private investment, has distorted markets and has pushed almost the whole energy industry into litigation.
Pemex argues that its performance has improved, when compared to the previous administration. But why compare to the worst? The current concern is that Pemex is racking up losses, by making enormous, reckless investments, above all in refineries, that would end up impacting public finances and sovereign debt.
Pemex boasts to Moody’s that it has permission to spend public money without any restrictions and that this should not affect its credit rating, because the federal government is committed to taking on all of its debt obligations. Thus, Pemex will never default on its creditors, since it will send all its bills to Mexico’s Finance Ministry, which presumably will decide whether it pays them or whether it will pass along all the debts to the next federal administration. Obviously, this is not judicious spending, but rather it puts public finances at risk.
If Pemex did spend responsibly, it would be developing, either on its own or through joint ventures, its hydrocarbon allocations, and not getting involved in new refineries and in retail sales of gas and gasoline. But the López Obrador government does not apply the concept of opportunity cost. Just as it did not complete the Texcoco airport nor provide counter-cyclical support to the economy when faced with the Covid-19 pandemic, it does not promote long-term oil and gas field development.
The Mexican economy has stagnated and, as any economist knows, when countries, like companies, no longer grow, they start having problems. Despite this, the President wants to recklessly multiply expenditures on social programs and pensions, without reducing them on his extremely expensive, and probably unviable and unprofitable, infrastructure megaprojects, such as Dos Bocas, Tren Maya, Felipe Ángeles Airport and the Transisthmus Corridor.
Although López Obrador professes discipline in spending, what is perceived is inefficient, ruinous public spending, very different from when he, as mayor of Mexico City, was applauded for drawing up a pension plan for old-age adults, which assigned fiscally realistic amounts as focalized support to a well-defined social group.
Today, the President has lost that focus. He is poorly advised, or else his proposals are whims with no technical or economic foundation. Pemex’s debt continues to grow and, even so, the company takes on ever more questionable commitments. Just in recent weeks, we have the examples of retail gas company Gas del Bienestar, the Deer Park refinery and the Zama oilfield, all of which will do very little to achieve the stated goal of not increasing the price of gasoline and gas.
The three will require major investments and at least the first two will have very low profit margins. Regarding Zama, if a private partner were to operate it, Pemex would share in the profits and could spend them on other priorities. Neither these projects nor the proposed constitutional reform in electricity, if it were approved, would lower energy prices for the poor.
The most viable and fiscally responsible approach to limit the impact of increases in the prices of gas, electricity and gasoline would be to promote focalized support for low-income communities. It is not controlling prices or by getting Pemex involved in retail sales. Such support is foreseen in existing laws and regulations and has been applied before in electricity tariffs and marine diesel fuel. In the case of liquid petroleum gas (LPG), it could be applied in certain geographic areas. But if public spending is poorly administered, it is foreseeable that energy policy will go from one failure to another and that could be, sooner or later, Mexico’s ruin.