By John Padilla, IPD Latin America, on March 30, 2020

What is the impact of low oil prices on the private sector in Mexico?

Low oil prices are impacting the Mexican private sector in many of the same ways we are witnessing around the globe. Countries that remain heavily dependent on oil are being hit particularly hard. For Mexico, the situation is further complicated by the Andrés Manuel López Obrador (AMLO) administration’s stubborn adherence to a nationalist agenda and refusal to deviate from that strategy despite the pandemic and associated economic bedlam transpiring globally. Mexico will not be immune to either impact. On the economic side, it is vital to place a few things in perspective before discussing the impact of low oil prices on the private sector.

Massive crude oil market oversupply has been particularly harsh on the Mexican oil basket, which has grown heavier with 63% of PEMEX’s production now comprised of heavy crude. The oil glut pulled the Mexican basket price down 67.5% for the period between February 14th and March 23rd vs. 51.1% for West Texas Intermediate (WTI). As the Mexican basket has fallen to well under US$ 20/ barrel in recent days, it has caught the attention of bondholders and magnified PEMEX’s heavy and untenable debt burden of over US$ 105 billion, plus large pension liabilities that have only swelled with the austerity measures AMLO enacted since taking office in December 2018. Despite lower royalties in 2020 and the hedges PEMEX and Hacienda have touted, disproportionately heavy fixed costs will demand further massive government capital injections in 2020. Depending on the oil price assumptions used and CAPEX cuts that will ultimately have to be made despite official statements suggesting otherwise, PEMEX will easily burn through US$ 1 billion/ month and likely much more. PEMEX’s finances will only deteriorate further without radical changes and the government formally assuming a major portion of its debt burden or guaranteeing it.

To continue reading, please visit the Wilson Center’s Mexico Institute website.