Mexican Government Tries To Deal with Drop in Oil Prices

Economic experts argue on Wednesday that the Mexican government should rethink its energy strategy given the recent plunge in the price of oil, since about 17.9 percent of its budget depends on petroleum income, but government officials assure that they are prepared.

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Although they agreed that “no country was prepared” for the latest crude oil price war, they said that the crisis comes at a time of vulnerability for Mexico, where in 2019 the GDP contracted by 0.1 percent and Petroleos Mexicanos (Pemex) reported a net loss of US$18.367 billion, almost double its loss in 2018.

“According to logic, what most suits Pemex and Mexico is for Pemex to reduce the losses as much as possible. At these prices, it cannot sustain … the level of production it had planned for, which in any event was seen as complicated,” said Rosanety Barrios, an energy analyst, to EFE.

Last Monday, the price of Mexican crude plunged 31 percent to US$24.34 per barrel from US$35.75 per barrel on the previous day, although on Tuesday it recovered slightly, closing at US$27.40 per barrel.

If the situation of “excessive volatility” continues, Barrios said that Mexico could lose up to half its oil income and this would affect almost 10 percent of the country’s budget.

However, the government of Mexico says it would be prepared to face such a drop in prices after creating a certain amount of economic “armoring.” The Treasury and Public Credit Secretariat (SCHP) reported on Tuesday that this year it invested US$1.15 billion in an unspecified insurance product to cover Mexican crude at a price of US$49 per barrel.

“We had already been preparing a strategy, thinking primarily about the (economic) deceleration and the effect of the coronavirus, which is equally valid now that we have the petroleum shock,” said SCHP chief Arturo Herrera at a press conference.

Morover, oil income now represents just 4 percent of the Mexican GDP, instead of the 8 percent it represented in past decades.