Costly Playthings

Luis Rubio

Oil could have been a blessing -or the curse that López Velarde, a 19th century poet. ordained for Mexicans- but PEMEX is the grand ballast that is sinking public finances and, with these, the country.  The distinction between these is key because it lies at the heart of the energy dispute the country is undergoing today: the State enterprise that monopolizes (increasingly moreso) oil exploitation is not the same as the resource itself. What is crucial is the resource and its clean and efficient exploitation for its transformation into wealth. PEMEX has become a great obstacle to the country’s development and is a burden for public finances that threatens economic stability.

The paradox is that it is the government of President López Obrador that has come most damaged from PEMEX. After all, it is he who anticipated converting the state-owned company into the principal source of economic growth, as in the seventies. Instead of being an endless source of cash, PEMEX is devouring all the monies in the federal budget, affecting health services, the normal operation of the government and even universities. It is imperative to ask whether the President knows that he confronts a bottomless barrel and before the risk of losing investment grade on its debt that is 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 debt is extremely high and has been wasted in subsidizing gasoline, transfers to the government, and bad investments, such as Chicontepec. This besides its endemic corruption.

In terms of production, according to what experts in the sector tell me, PEMEX’s great fall from grace, or bad luck, was to have come upon the Cantarell oil field, because that field was so productive that no one worried about developing other possibilities or about training personnel for a time of less abundant exploitation. While Cantatrell lasted and oil prices were high, no one cared about the company’s inefficiency: when the cost of producing a barrel was, for the sake of argument, twenty dollars, and  was sold at one hundred, at a nominal profit of eighty dollars per barrel, frittering away two or three dollars on bad practices or corruption seemed irrelevant.

Now, the government possesses no more fiscal space for defraying the costs of basic functions and financing its pet projects due to its elevated debt and high interest rates. This is not the case of 2009 in which the federal debt was less than 30% of the GNP and the hydrocarbon reserves were substantially superior to those of today. Nor is it the case of the seventies when the reserves grew like foam, driving the rest of the economy with unusual demand for steel, pipes, cement, highways, etc.

Among the detractors of the energy reform undertaken by the previous government there is a clear propensity to view it as an ideological obsession. Seen in retrospect, what in reality that administration intended was something very distinct given that it clearly recognized PEMEX’s grave situation. Its objective was to develop the industry beyond PEMEX in order to generate a greater cash flow toward the economy in general.  That is, its objective was identical to that of President López Obrador, except that they did not want to continue to depend on an inefficient company, without 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 reform indicates that it is not being marginalized but rather protected.

The crucial point lies in what is important to Mexico is that those resources be utilized in the most efficient and multiplier manner possible. What the country possesses is an enormous source of potential wealth, and nothing more. What matters is not who exploits the resource but that it is exploited to achieve the benefit. However, counter to AMLO’s objective and to what is established in the Mexican Constitution, the government is sacrificing programs and fundamental functions to maintain the state-owned enterprise afloat. What PEMEX needs is to clean up its operation, not having subsidized its inefficiency.

In an ideal world, the true rescue of PEMEX would involve reconfiguring the refineries, adjusting labor costs and renegotiating the financial and labor liabilities of the company in order for these to match the real cash flows of the entity. That is, instead of continuing to infuse thousands of millions of scarce dollars into PEMEX, the entity’s finances would have to adjust to its productive reality and, once that is done, its debt would have to be renegotiated with the banks and bond holders. And, without doubt, part of the renegotiation would inexorably require reconsidering the taxes, explicit and implicit, that the government charges the company.

The point is that PEMEX should become an entity devoted to exploiting oil resources and not to be a source, as before, of federal government subsidies and, currently, of liabilities. The true rescue of PEMEX consists of cleaning it up. The recession obligates reviewing these costs and, simultaneously, renders it possible. Failing that, the financial markets will surely show the way, at an indescribable cost.