Much lower oil prices seem to have concentrated the minds of Mexican leaders on their country’s fast approaching fiscal crisis. As I’ve written many times, roughly 40% the Mexican federal budget is financed by oil exports from the state-owned PEMEX oil company. But production is falling rapidly, has been doing so for a couple of years, and promises to continue falling even faster after 2010. Mexico was clever enough to hedge its oil at $70 a barrel through 2009, but leaders are quickly calculating how large the 2010 budget deficits will be if oil production continues to decline and oil prices do not rise substantially after 2009.
Two recent reports (here and here) say that the country is taking heroic measures to increase production at their Chicontepec field in order to make up for continuing large declines at Cantarell, its giant field that produces the bulk of Mexican oil. Mexican crude production is reported down 9.6% in October and exports were down even more steeply, declining 17.6%.
Perhaps of most concern is the Financial Times story about the new Mexican oil law that was supposed to enable PEMEX to develop new fields in the GOM despite Mexico’s constitutional prohibition against foreign interests taking an equity interest in Mexican oil. This report says the incentives for foreign company to assist Mexico in finding oil allowed by the recently passed legislation are nowhere near as powerful as are needed to get the job done.
If true, as I suspect these reports are, Mexico could face a fiscal crisis within just a few years. I’ve been negative on Mexico for some time. I wish I knew a good way to play the fall of the Mexican economy. Suggestions are most welcome.
