Oil may have been a blessing for Mexico, or the curse that 19th-century poet Ramón López-Velarde put on the country. However, the state-owned oil company (PEMEX) is today the great ballast sinking Mexico’s public finances and, with them, the country. The distinction between oil and PEMEX is key because it lies at the heart of the energy dispute that the country is undergoing. The state-owned company that (increasingly) monopolizes oil exploitation in Mexico is not the same as the natural resource itself. What is crucial for Mexicans is oil, along with its clean and efficient exploitation to transform it into wealth. PEMEX meanwhile has become the great obstacle to the country’s development and is a burden for government finances threatening Mexico’s economic stability.
The paradox is that the biggest victim of the current state of PEMEX situation is President Andrés Manuel López Obrador (AMLO) and his government. After all, it was López Obrador who anticipated reconverting the state-owned company into Mexico’s main engine of economic growth, as in the 1970s. Instead of being a source of cash, PEMEX is now devouring all the money in the federal budget affecting health services, the normal operation of the government and even that of public universities. It is imperative to ask whether President López Obrador knows that he is looking at a bottomless pit and that Mexico runs the risk of losing its investment-grade credit rating, crucial for the stability of the government’s finances.
The picture is clear: PEMEX is the world’s oil company most deeply in debt. Its production has been declining over the past decades and its operation is highly inefficient. The company’s debt is extremely high and has been wasted in gasoline subsidies, transfers to the Mexican government, and bad investments, such as the fields in the Chicontepec Basin north-east of Mexico City. This without counting the state-owned company’s endemic corruption.
Regarding oil production, experts in the sector tell me that PEMEX’s great fall from grace, or bad luck, was to have stumbled upon the Cantarell oil field. The field was so productive that no one worried about developing other possibilities or about training personnel for a time of less abundant exploitation. While Cantarell lasted and oil prices were high, no one cared about the company’s inefficiency. When the cost of producing an oil barrel was, for the sake of argument, US $20 dollars, and was sold at US $100 hundred, at a nominal profit of US $80 per barrel, frittering away two or three dollars on bad practices or corruption seemed irrelevant.
Now, the López Obrador government has no more fiscal space for paying the costs of basic functions and financing its “pet projects” due to Mexico’s elevated debt and high interest rates. This was not the case of 2009, when the Mexican federal debt was less than 30% of GDP and that reserves were substantially superior to those of today. Nor is it the case in the 1970s when reserves were growing as foam, boosting the rest of the economy with the unusual demand for steel, pipes, cement, roads, etc.
Among the detractors of the energy reform undertaken by the previous Mexican government -including many officials in the new López Obrador administration- there is a clear propensity to view it as an ideological obsession. Seen in retrospect, what was really intended was something very different given that it clearly recognized PEMEX’s grave situation. The previous government’s goal was to develop the oil industry -beyond PEMEX- in order to generate greater cash flow toward the larger Mexican economy. That is, the previous Mexican government’s goal was actually identical to that of López Obrador except that it did not want to continue to depend on an inefficient company that does not have the most advanced technology and, above all, while running excessive risks in the development of new oil fields. The fact that PEMEX is a partner in practically all private projects arising from the energy reform shows that the state-owned company is not being marginalized but rather protected.
The crucial point is that what really matters to Mexico is that these natural resources be used in the most efficient and multiplying way possible. What Mexico has is an enormous source of potential wealth, and nothing more. What matters is not who exploits this natural resource but that whether if exploited to achieve the Mexican peoples’ benefit. Contrary to López Obrador’s goal -and to what is established in the Mexican Constitution- the government is sacrificing programs and fundamental functions to maintain Pemex, the state-owned enterprise afloat. What PEMEX needs is to clean up its operation, not having subsidized its own inefficiency.
In an ideal world, the true rescue of PEMEX as a company would involve refurbishing its existing Mexico’s refineries, adjusting its labor costs and renegotiating its financial and labor liabilities. This, in order for these to match the company’s real cash flows. That is, instead of continuing to infuse thousands of millions of scarce dollars into PEMEX, the company’s finances would have to adjust to its productive reality. Once that is done, PEMEX debt would have to be renegotiated with banks and bond holders. And, without doubt, part of this renegotiation would inexorably require reconsidering the Mexican government’s tax treatment of PEMEX, both the explicit and the implicit.
The key point is that PEMEX should become a company devoted to exploiting oil resources. The company should stop being a recipient of Mexican government subsidies and even more, a source of liabilities. The true rescue of PEMEX consists of cleaning it up. The coronavirus recession mandates reviewing these costs and, at the same time, renders it possible. If the López Obrador administration fails to do so, financial markets will surely show the way, at an indescribable cost.
* Luis Rubio is chairman of the Mexican Council on Foreign Relations and of México Evalúa-CIDAC. A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @lrubiof
