Mexico: High Oil Prices May Prove Mixed Blessing : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Nando Times

By MARK STEVENSON, Associated Press

MEXICO CITY (September 14, 2000 8:40 p.m. EDT - Since billions of dollars in extra oil revenue are now flowing into government coffers, it may seem strange if Mexican officials begin bemoaning high oil prices.

Still, high crude prices are hardly an unqualified victory even for an oil-exporter like Mexico. Globalization has bound it to the U.S. economy, and manufactured exports - vulnerable to high fuel prices - are now Mexico's mainstay, not oil.

The government is expected to collect some $3.6 billion in extra oil revenue this year. How that windfall is spent may well decide whether the price boom ultimately benefits or hurts Mexico, the world's fifth-largest oil producer.

It's a tale about how globalization has put Mexico on the horns of a dilemma: the peso gained in value as oil prices rose, but then lost ground Wednesday as oil hit $35 per barrel - because markets saw that price as detrimental to Mexico.

Mexico "should be careful, and not be too greedy," said Fausto Alzati, who is coordinating energy affairs for president-elect Vicente Fox.

Fox has sounded even more concerned, saying "prices should not hold back growth, because if this happens, the first to be affected would be Mexico."

Many see the expressions of concern as disingenuous.

"They're play-acting ... laughing all the way to the bank," said Walter Molano, an analyst at BCP Securities in Connecticut who also suggested that "Mexico is lining itself up for a recession, for a pretty severe shock right now."

Still it's a far cry from the 1970s, when Mexican officials saw international economics in Darwinian terms: some countries are fortunate enough to have oil, some aren't. The president at the time, Jose Lopez Portillo, proudly announced that his main job was to "manage all the wealth."

Fox said this week he wants "a fair price," but has a tough time determining what exactly that would be. His 2001 budget plan is expected to set a projected price of about $18 per barrel.

But Energy Minister Luis Tellez predicted prices will remain much higher than that for months to come - a situation he blamed on the bargains enjoyed for years by oil-consuming countries.

"Because of the low prices in 1997, 1998 and 1999, there were few investments (in production), so now demand is using up all the capacity," Tellez said, explaining why Mexico can't increase output by a promised 200,000 barrels per day in the short term.

The memories of the lean times - when oil prices dropped below $10 per barrel, forcing government spending cuts - makes it hard for many here to be too sympathetic about price complaints.

"It's a small little blip of compensation, that's called justice," said Federico Estevez, a political scientist at the Autonomous Technological Institute of Mexico.

There's a sense of injustice among oil-producing nations being blamed for the problem. Venezuelan Oil Minister Ali Rodriguez noted that "the principal factor that increases (fuel prices) for the man who goes to the gas station to fill his tank, are high taxes."

The Organization of Petroleum Exporting Countries, of which Mexico is not a member, estimates that taxes and refining activities contribute to 84 percent of gasoline prices while the price of crude contributes 16 percent.

And international oil prices, in real terms, are nowhere near the levels seen in the 1980s. Taking into account inflation, even at current prices oil remains a bargain, Molano notes.

But Mexico has changed a lot in the 1990s, becoming a sort of hybrid of producer-consumer. Domestic fuel prices have been raised to international levels, so consumers here don't get any breaks.

And now, roughly three-quarters of Mexico's exports are manufacturing goods - most bound for U.S. markets - and oil accounts for less than 10 percent.

"If there are any concerns on the U.S. economy, that will affect Mexico," said Gabriel Sod-Hoffs, a currency analyst at Chase Securities. "If the economy cools down too much, then all of (Mexico's) other exports would slow down and that would be dramatic."

What Mexico should do, analysts say, is use the oil money to pay down debt, and reduce the government's reliance on oil income - which currently accounts for about a third of federal revenues - by implementing tax reforms.

If not, Mexico could relive the dark days of the early 1980s, when the government spent oil money freely and ran up debt. Then the world economy slowed, crude prices plummeted and Mexico entered a recession.

But many people in Mexico, long battered by the whims of crude markets, have become a bit fatalistic about events far beyond their control.

"It's a wheel of fortune," said Estevez. "When it turns again, we'll be back where we started."

-- Rachel Gibson (, September 15, 2000

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