Antonio O. Garza (Ambassador to Mexico, 2002-2009)
Cross-posted from Ambassador Garza’s interview with Grapevine Magazine.
With lower oil prices now around $50 a barrel, what effects do you foresee for Mexico and for Round One bidding?
The low global oil prices have absolutely changed the energy landscape for countries across the world and Mexico is no exception. For Mexico, an oil producing and exporting country, the most immediate effect is the fiscal one, as less revenue flows back into Pemex or is channeled into the federal budget, which has been receiving roughly one third of its funding from these energy revenues.
The Mexican government has actually been preparing for this type of drop, by employing an extensive annual hedging scheme that, along with gasoline taxes, will somewhat soften the blow this year. But if prices don’t start rebounding, and it doesn’t look like they will anytime soon, then they’ll need to make up for the lost revenues. One way the government could do this would be to raise taxes, and since they recently promised not to do this, their options will largely be constrained to cutting spending, taking on more debt, or doing a little of both. In fact, we’ve already seen them slash planned government spending by over $8 billion in response to oil prices. And with roughly half of that earmarked for Pemex, it’s not hard to imagine the types of effects that this will have for Mexico’s energy sector, not to mention the country’s economic growth more broadly.