Mexico is currently facing one of the biggest economic recessions in the country’s two hundred-year history of independence. Some Mexican policy makers blame the economic crisis on this year’s decrease in tourism, while others attribute it to the continued dependence of the Mexican economy on the United States, pointing to its neighbor’s recession as a principal cause for the country’s woes. Nonetheless, Mexico’s plummet in oil production and the decline in the price of oil are two main contributors to its present economic downfall. While other countries have begun to pull out of the recession, it appears that the fall in oil production and prices have further led to an ongoing decline in Mexico’s economy, which the country’s planners are finding difficult to reverse.

Current Oil Situation

Oil is at the heart of the Mexican economy. Profits on its extraction are the country’s number one revenue, accounting for approximately 40 percent of Mexico’s total revenues. Due to the decline in the price of oil that began last year with the escalation of the global recession, Mexico’s oil-dependent economy has suffered grievously. Prior to the sag in oil prices, when other oil producing countries were taking advantage of the tremendous peak in prices, Mexico was hit particularly hard; government officials reported that last year’s drop in oil production cost the Mexican government an estimated US$20 billion in lost revenues. This year’s plunge in oil prices has resulted in oil export revenues being recorded at only $1.25 billion per month for the first seven months of 2009, a fall from an average of $1.44 billion per month in 2008. The falling prices and production rate continue to damage the economy, and many blame the Mexican government for its failure to channel new investments in to various oil-producing fields, along with its mismanagement of revenues. Mexico feels the pressure to convert its oil profits into public spending in order to generate immediate results and to keep a lid on the country’s mounting social tensions; instead it sometimes foolishly refuses to put aside some of the profits to ensure financial stability.

Petróleos Mexicanos (Pemex), Mexico’s state owned petroleum company, and one of the ten largest oil companies in the world, is an indispensable contributor to the country’s public sector earnings. Despite being one of the world’s largest crude oil producers and exporters, Mexico still must import 40 percent of its refined petroleum products. In fact, the International Energy Outlook predicts that by 2020 Mexico is going to be a net importer of petroleum products, reaching 300,000 barrels per day (bpd) by 2030. Mexico is forced to import such a large percentage of refined petroleum products because it currently lacks the technologies to refine them itself, creating another issue for Mexico’s already crushing economic tribulations. Even though state-owned Pemex is the country’s main source of revenue, contributing $98 billion to Mexico’s economy in 2008, the company still reported a loss of $8.7 billion last year after it paid the national treasury $57 billion in taxes and royalties. The government is so dependent on Pemex that it forces the company to pay exorbitant taxes, pushing it further into debt so that the government can barely discharge its economic obligations.

Internal Chaos

In addition to lost revenue as a result of declining prices and production, Pemex has also suffered losses due to the megalithic levels of corruption on the part of Pemex executives which is also related to the operation of the pipelines. Corruption is not a new occurrence at Pemex, and has in fact been occurring for decades. In 2007, Raúl Muñoz, a former Pemex executive, was fined $80 million and banned from holding a public office for ten years for the misappropriation of $170 million in company funds, some of which was used to pay for not one, but two liposuction operations for his wife. It is not just the top executives at Pemex who are involved in corruption scandals within the company: in 2000, Pemex dollars were inappropriately used by the petroleum workers union, Sindicato de Trabajadores Petroleros de la República Mexicana (STPRM), to help fund the campaign of presidential hopeful Francisco Labastida of the Partido Revolucionario Institucional (PRI).

Pipeline corruption is rampant in Mexico and costs Pemex an estimated $2 billion in lost revenue each year. Tapping pipelines to steal gasoline, diesel, and jet fuel occurs in most, if not all, of Mexico’s 31 states. Pemex found nearly 400 illegal connections to pipelines last year, estimated to have cost the company roughly $720 million. According to the Mexican government, gangs use siphoned fuel to power their aircrafts involved in drug smuggling. In fact, in 2004, former Mexican president Vicente Fox launched an investigation to curtail widespread oil theft. However the investigation was unsuccessful because the practice continues to be a growing issue for Mexico’s oil industry. Thieves are now stealing crude oil, which they must smuggle out of the country and have refined elsewhere in order for it to have value. In May, U.S. oil trader and former president of Trammo Corporation Donald Schroeder pleaded guilty to purchasing stolen Mexican condensate, a raw hydrocarbonate similar to crude oil used to make plastic, as well as coordinating its shipment to Texas via barge.

Additionally, in August another company was discovered purchasing oil which had been illegally taken from Pemex: a Texas chemical plant owned by German based BASF Corporation. The chemical plant was found to be purchasing $2 million worth of petroleum products smuggled into the U.S.; the company denies having any knowledge of the illegitimacy of the oil, and court documents yielded no evidence of their awareness. Georgina Kessel Martinez, Mexican Secretary of Energy, believes it will take some time before oil theft is no longer practiced in the country, stating, “This is a process that is going to take some time because PEMEX not only needs to install new technology but also needs to conduct an extensive analysis of its system of ducts and create better tools to combat fuel theft.” She acknowledges that fuel thieves have far more advanced technology and techniques than Pemex, and stated that Pemex plans to spend $76 billion between now and 2012 to create a system in order to better monitor the oil ducts.

Although Pemex claims to be making progress in putting an end to the practice, oil theft is ongoing, due in large part to the participation of numerous as well as strategically situated Pemex employees in theft rings. In July, federal officials from the Procuraduria General de la Republica (PGR) and other government agencies seized documents from the security department at Pemex headquarters that implicated various Pemex employees in a scandal involving millions of dollars in oil siphoned from various pipelines. Authorities have yet to arrest anyone in the case. According to La Jornada, a Mexico City daily, the PGR is investigating nine customs inspectors, 20 Pemex employees, and 100 business owners believed to be involved in an elaborate conspiracy. The STPRM workers’ union is believed to be linked to the scheme as well. “The problem…of corruption in PEMEX…is so huge that this case requires a thorough investigation by the Senate,” said Sen. Ricardo Monreal, a member of the center-left Partido del Trabajo (PT). Pemex needs to resolve its internal inconsistencies if it ever wants to make headway in restoring lost revenues.

Where does the oil come from?

The largest source of oil and most crucial source of income for Pemex is the offshore oilfield, Cantarell. The problem now facing Pemex and the Mexican economy is that oil production at Cantarell has fallen at a rate averaging about 25 percent since its peak in 2004. This year alone, production at Cantarell has declined by nearly 35 percent to just 737,400 barrels per day, 11 percent below the minimum figure anticipated in the company’s budget. Even President Felipe Calderón has acknowledged that Pemex’s oil production has fallen between 2008 and 2009 by about 215,000 barrels per day. With production decreasing significantly, the only way that Mexico can sustain revenue levels is by having the price of oil remain above $70 a barrel. At one point in the year however, the price for crude oil fell to nearly $30 a barrel, far from the figure that Mexico needs for obtaining the required profit increase. Even if oil prices were to spike today, Mexico would still not benefit for quite some time, as oil production is not expected to pick up for the remainder of the year. Some, such as Pemex Director General of Exploration and Production Carlos Morales, claim that Cantarell’s production will stabilize when it reaches 400,000 barrels per day; others predict that this vital oilfield will only be productive for another nine years.

Yet despite the plunge in oil production, Mexico continues to depend on Cantarell to supply the country with the majority of its oil. Engineers at Pemex have long known that production at the reserve would begin to dwindle; however, government officials did not take these warnings to heart until the predicted problem became a national crisis. The Mexican government has relied too heavily on an oilfield that is expected to run out shortly and failed to invest in oilfields outside of Cantarell. Recently, efforts have been underway to increase production at various other oilfields, namely Ku Maloob Zaap (KMZ), to offset the loss from Cantarell, but the decline at Cantarell far exceeds the increase in output from new, less promising oilfields. KMZ accounts for 63 percent of the total increase in production from other oilfields, producing 183,000 barrels per day in the first seven months of 2009. However, the amount of money that would come from such a quantity of oil does not seem to be enough to make up for this year’s loss alone of an estimated $5.1 billion drop in revenue.

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