Mexico’s ATM is stewing in a toxic mix.
Despite the partial recovery of oil prices, 2016 was not a kind year to Mexico’s fast-shrinking state-owned (but soon to be privatized) oil giant, Pemex. For over 70 years the company served as a huge funding asset, at times providing as much as one-third of total government revenues. But in 2016 it became a national liability, requiring a $4.2 billion bailout from the government. It’s unlikely to be the last.
During the first 11 months of 2016, the company registered average production of 2.16 million barrels per day, its lowest in more than three decades. Pemex forecasts that production will fall to around 1.94 million barrels a day by 2017, marking the first time that the figure has fallen below the 2 million barrel point since 1980. Given the gathering deterioration in the company’s accounts — including a total debt overhang of around $100 billion — daily production could fall by as much as $1.6 million per day by 2020, Morgan Stanley warns.
As goeth Pemex’s production, so goeth Mexico’s oil revenues, which have shrunk from 6% of GDP three years ago to 2.5% today. The export figures are just as ugly. In 2011, when the price of Brent crude averaged over $100 a barrel, Pemex’s export revenues hit a historic peak of $49 billion, a monthly average of $4.11 billion. In the first quarter of 2016 the monthly average was just $893 million. That’s a plunge of 78%.
In November Pemex reported a $10 billion loss, the biggest quarterly shortfall in company history. The company has now reported $70 billion of accumulated quarterly losses since 2012. Worse still, their respective size keeps growing. The company’s losses through the first three-quarters of 2016 outpaced total losses for the last three years combined.
So, that, in a nutshell, was Pemex’s 2016. How do things bode for 2017?
If the last two days are any indication, not very well. On Sunday, the first day of the year, thousands of people all over the country marched on Pemex gas stations, blocked roads and picketed refineries, to register their rage at the government’s latest massive hike in gasoline and diesel prices, which has been dubbed “gasolinazo” in Spanish (roughly meaning “gas punch”).
Their anger is understandable: Mexicans, together with South Africans, currently spend more of their annual income on fuel than residents of 59 other countries tracked by Bloomberg, due largely to the country’s low salaries and high gasoline consumption.
The gasolinazo just made matters a whole lot worse. As the price liberalization policies included in President Enrique Peña Nieto’s 2014 energy reforms began kicking in over the last few days, average gasoline prices have surged by 20.1% and diesel prices by 16.5% — in stark contrast to previous government assurances!
Peña Nieto had repeatedly promised that market liberalization would lead to markedly lower prices at the pump. However, as his government began withdrawing the public subsidies that had underpinned the market for decades, the only way for prices to go was up, especially with global oil prices also trending upward.
January’s increase in unleaded gasoline will be the biggest since November 1998. The jump in prices risks fueling inflation at a time when a slump in the peso has already raised concerns about surging consumer prices, leading the Bank of Mexico to hike interest rates a staggering five times last year, to little avail: the currency was one of the world’s worst performers in 2016, losing 17% of its value against the dollar.
“This will have a very significant impact on inflation,” Luis Adrian Muniz, an analyst at Vector Casa de Bolsa, told Bloomberg, calculating that the price hikes will add 0.80 percentage point to the consumer price index in January alone. “This will hit the consumer sector and the economy.”
Since the price hike gasoline shortages have swept several states across Mexico, while officials have accused some stations of under-reporting their supply. Haulage companies have already begun hiking their fees and organizations representing farmers and smallholders have called nationwide protests against the rising costs of production resulting from a much stronger dollar and higher fuel costs.
Meanwhile, Pemex faces the prospect of rising competition in many of its traditional markets. U.S. refiners are already making massive inroads, not only into Mexico but across Latin America and the Caribbean. As Bloomberg reports, they exported record amounts of oil products last week, taking market share from struggling competitors in Mexico and the Caribbean.
Almost 4 million barrels a day of gasoline, distillates like diesel and heating oil, and propane left the country as refiners in Texas and Louisiana processed the most crude in at least 24 years. Demand has grown this year as competitors in Latin America sputtered out with maintenance issues, Andy Lipow, president of Lipow Oil Associates LLC, said by phone from Houston.
At the same time Pemex will have to contend with stiff competition from other gas station operators for the first time in decades. Of the first five companies to open operations in the sector three will be Mexican (Hidrosina, La Gas and Oxxo Gas) and two U.S.-based (Gulf and Petro-7). From 2018, foreign operators will even be allowed to sell imported gasoline from the gas stations they operate. It will be the first time since Mexico’s oil industry was nationalized, in 1938, that non-Mexican gasoline will be legally sold from non-Mexican gas stations.
While the increased competition will almost certainly be a welcome development for most consumers, especially if it actually leads to lower prices, for Mexican taxpayers there could be very costly knock-on effects. After all, for Pemex and its myriad partners, the retail business is a vital source of funds and profits, generating roughly 730 billion pesos ($36 billion) of revenues a year. Now it will have to begin sharing those revenues with growing numbers of domestic and foreign competitors, as well as investing enormously in its retail outlets just to preserve some degree of market share.
Investing a lot more and producing a lot less, while losing money hand-over-fist, is not a very sustainable way of doing business. The biggest problem Pemex face going forward is servicing a growing debt pile of over $100 billion from the proceeds of a continually shrinking revenue base. If it can’t, Mexico’s increasingly debt-burdened government will have to step in, again. By Don Quijones, Raging Bull-Shit.
At the same time, the world has become immensely exposed to Mexico’s debt and peso. Read… Why the Peso Crisis Won’t be “Contained” to Mexico