Miriam Grunstein
Division of Legal Studies

Oil, Economics and Politics

Wed, 01/25/2012 - 11:15

Pemex’s taxes account for more than a third of Mexican federal government revenues. The heavy production decline of the NOC is therefore of great relevance for the country’s economy, fiscal situation and geopolitical position.

According to Pemex statistics, the company’s total crude oil production went down from 3.38 million bbl/day in 2004 to just 2.55 million bbl/day in 2011. This evolution is largely due to the once fruitful Cantarell field, whose production declined drastically from 2.14 million bbl/day in 2004 to 558,000 bbl/day in 2010. Other fields like KuMaloob-Zaap have seen their production increase, but not enough to sustain total production levels until now. Some pessimistic scenarios predict that, if there aren’t any changes, Mexico might become a net oil importer in the next decade.

“If Mexico becomes a net oil importer we are going to have an economic crisis of tremendous proportions, because we are going to be fiscally bankrupt, and the states in Mexico depend largely on the finance provided by the federal government,” says Miriam Grunstein, Division of Legal Studies at CIDE, “and political control of the state depends on how much the federal government gives to the states, and to the municipalities.”

Duncan Wood, Director of the International Relations programme at ITAM, thinks that a fiscal reform is needed to diversify government income sources and also take the load o Pemex. Theoretically, this reform was urgent a long time ago, but action has been delayed by rising Pemex revenue and resulting federal tax income due to high oil prices. “And that’s the problem in Mexico: until there is an actual crisis, we don’t have to do anything,” says Wood. “If the direst predictions are correct, and Mexico becomes a net importer, then it’s very urgent. But very urgent means 2015 or 2016, maybe 2020. Pemex is doing everything it can to keep its numbers up and it is doing a pretty good job.”

Wood points out that there has been some positive progress on diversifying the government’s fiscal revenue. “They have managed to increase their tax take from 9.5% to over 10%. That is good. We’re moving slowly in the right direction, but a lot more needs to be done,” he says. “A lot depends upon what you are going to do with competition policy, with the monopolies and about reducing their power and actually forcing them to pay their fair share.” Wood also says that Pemex might be able to diversify its own income stream by focusing on shale gas development in the next years, thus also diversifying the government’s revenue.

Further reform of the energy sector would also be necessary in order to prevent Mexico’s oil production from being insucient to cover the country’s oil demand. If the technology needed to enhance production is required in the next three or four years, then it has to come from joint ventures with other companies, according to Wood. “And I think the only way that this is going to happen is through constitutional reform,” he says.

The pessimistic scenario that Mexico becomes a net oil importer would be damaging on an international geopolitical level. However, in terms of relations with the United States, although it would weaken relations, it would not matter as much as a few years ago, according to Wood. He says that the US is not as worried about Mexican oil production anymore, because of Canadian tar sands, domestic oil development and energy eciency, among other things. “The big issue in Mexican-US relations is going to be security. Oil matters, but it is not as crucial as it once was,” Wood says.

Asked about how being a net importer would potentially impact Mexico’s positions on financial markets, Wood says that it all depends upon whether the Mexican government has replaced the income with other fiscal sources. “If it hasn’t, it’s going to be very damaging,” he says, “But let’s remember that over the past three years, since the financial crisis of 2008, Mexico has essentially been a darling of the financial markets. It has done everything absolutely right - look at the fiscal position of the government in terms of its debt levels, and its tiny deficit. Mexico is one of the golden children of the international financial system right now.” While the world increasingly considers Mexico to be a healthy economy, with sound fiscal management in the past years gaining the country a strong reputation, winding down its budgetary dependence on Pemex might prove to be an even tougher financial and political test.