Weak Mexican peso shows oil threatens growth, surplus
Sunday, 28 October 2007
Valerie Rota and Patrick Harrington
Mexican President Felipe Calderon is delivering a grim message: The largest oil producer in Latin America is running out of crude.
``Our oil reserves have been consistently falling,'' and the decline is ``severely threatening'' government finances, Calderon told a nationwide television audience in an address last month at the National Palace. That's the same place where seven decades earlier Lazaro Cardenas cemented the anti-American legacy of his presidency by nationalizing the petroleum industry.
The ban on private investment in its oil monopoly is depriving the nation of the benefits of record high prices and contributing to a slowdown in economic growth. Production of crude, Mexico's biggest export, has fallen 8.0 percent since 2004 to a seven-year low, data compiled by the government show.
Mexico is being punished for its inefficiency in the foreign-exchange market. The peso is down 0.02 percent against the dollar this year, the worst performance among the 16 most- traded currencies. New York-based Goldman Sachs Group Inc. and Credit Suisse Group in Zurich say the slump will deepen.
``If the oil output situation was different, if it was stronger, if oil output was rising, not falling, we most likely would be seeing a stronger peso,'' said Alonso Cervera, a Latin America economist at Credit Suisse in New York. The second- largest Swiss bank forecasts the peso will weaken 5.4 percent to 11.4 per dollar by the third quarter of 2008. It was little changed at 10.8220 at 5:18 p.m. in New York.
The drop in production is hurting economic growth by reducing funds to improve highways, bridges and ports, Cervera said. Oil provides about 40 percent of government revenue and the slowdown contributed to a 47 percent decline in the nation's surplus in August, according to the Finance Ministry.
Mexico's economy has grown at an average annual pace of 2.8 percent since 2002, down from 4.4 percent during the previous five-year period.
Output has dropped to a seven-year low of 3.12 million barrels a day as the state monopoly Petroleos Mexicanos fails to develop new reserves to offset dwindling production at Cantarell, the world's largest offshore field.
Crude rose as high as $90.07 a barrel in New York last week and traded at $87.56 a barrel today. The 50 percent increase from a year earlier pushed the Canadian dollar up 19 percent against the U.S. dollar, while the Brazilian real gained 18 percent and the Norwegian krone strengthened 14 percent. All three are oil exporters.
Mexico was the world's sixth-biggest producer last year, down from fifth in 2005, according to the Energy Information Administration. In 1921, Mexico was second-biggest.
In his Sept. 2 national address, Calderon, 45, said the country has proven reserves to last nine years. Venezuela, the second-biggest oil producer in Latin America, has reserves to keep pumping at current levels for more than a century.
Petroleos Mexicanos' $15.4 billion investment plan this year covers only half what's needed to ``fully develop'' the country's oil and gas industry, said George Baker, who runs Houston-based energy research company Baker & Associates.
Pemex, as the company is known, also needs access to the deep-water drilling technology that foreign companies have to boost reserves, said Baker, who's been covering Mexico for three decades. Mexican billionaire Carlos Slim, the world's second- richest man, and former Federal Reserve chairman Alan Greenspan have criticized the investment restrictions this year.
``Oil production in Mexico is declining and declining fast,'' said Alberto Ramos, a Latin America economist in New York with Goldman Sachs, the world's largest securities firm. ``What is needed is a serious energy reform that would allow Pemex to partner with other companies.''
The peso will weaken 2.6 percent to 11.1 per dollar by March, Ramos said. The slowing U.S. economy, which is weighing on Mexican exports and migrant worker remittances, also hurts the peso, he said.
Mexican manufacturing exports have risen 7.9 percent this year, the slowest pace since 2003, according to data compiled by Banco de Mexico, the central bank. Remittances rose 2 percent in August from a year earlier, the smallest increase since the government began tracking the figures in 1995.
Calderon, who served as energy minister for eight months under his predecessor Vicente Fox, has made no direct calls to end the 1938 ban on private oil ownership, said Sergio Mendez, who manages $1.6 billion in assets at Prudential Bank SA in Mexico City. Since taking office in December, the president has instead pointed out the shortcomings of the state-run industry, he said.
That tack is necessary to build support in a country where Cardenas remains a national hero for kicking out Standard Oil and Royal Dutch Shell, said John Womack Jr., a professor of Latin American history and economics at Harvard University in Cambridge, Massachusetts.
A soldier who rose to power after the 1910 Mexican Revolution, Cardenas is featured in statues throughout the country, including a monument known as the ``Fountain of Oil'' on the capital city's main boulevard. His 1938 decision was so popular that citizens donated everything from jewelry to chickens to help the government pay for expropriating foreign companies.
``Cardenas is a kind of mythological national hero,'' said Womack. ``If you undo what he did, it would be seen as just cutting the ground out from under the country.''
Pemex may be part of the effort to bring in international investors. ``The world is changing and Mexico is facing new challenges,'' says an advertisement that started appearing this month. ``Our responsibility: That future generations have the energy resources necessary for their development.''
The company will use 60 percent of its ad budget this year to run the promotions on radio, television and in newspapers and cinemas, spokesman Carlos Ramirez said.
``They are desperately trying to generate public support, or at least trying to moderate public antipathy, to the idea of allowing foreign investment in the energy sector,'' said Chappell Lawson, a political science professor at the Massachusetts Institute of Technology in Cambridge.
Bloomberg
Mexican President Felipe Calderon is delivering a grim message: The largest oil producer in Latin America is running out of crude.
``Our oil reserves have been consistently falling,'' and the decline is ``severely threatening'' government finances, Calderon told a nationwide television audience in an address last month at the National Palace. That's the same place where seven decades earlier Lazaro Cardenas cemented the anti-American legacy of his presidency by nationalizing the petroleum industry.
The ban on private investment in its oil monopoly is depriving the nation of the benefits of record high prices and contributing to a slowdown in economic growth. Production of crude, Mexico's biggest export, has fallen 8.0 percent since 2004 to a seven-year low, data compiled by the government show.
Mexico is being punished for its inefficiency in the foreign-exchange market. The peso is down 0.02 percent against the dollar this year, the worst performance among the 16 most- traded currencies. New York-based Goldman Sachs Group Inc. and Credit Suisse Group in Zurich say the slump will deepen.
``If the oil output situation was different, if it was stronger, if oil output was rising, not falling, we most likely would be seeing a stronger peso,'' said Alonso Cervera, a Latin America economist at Credit Suisse in New York. The second- largest Swiss bank forecasts the peso will weaken 5.4 percent to 11.4 per dollar by the third quarter of 2008. It was little changed at 10.8220 at 5:18 p.m. in New York.
The drop in production is hurting economic growth by reducing funds to improve highways, bridges and ports, Cervera said. Oil provides about 40 percent of government revenue and the slowdown contributed to a 47 percent decline in the nation's surplus in August, according to the Finance Ministry.
Mexico's economy has grown at an average annual pace of 2.8 percent since 2002, down from 4.4 percent during the previous five-year period.
Output has dropped to a seven-year low of 3.12 million barrels a day as the state monopoly Petroleos Mexicanos fails to develop new reserves to offset dwindling production at Cantarell, the world's largest offshore field.
Crude rose as high as $90.07 a barrel in New York last week and traded at $87.56 a barrel today. The 50 percent increase from a year earlier pushed the Canadian dollar up 19 percent against the U.S. dollar, while the Brazilian real gained 18 percent and the Norwegian krone strengthened 14 percent. All three are oil exporters.
Mexico was the world's sixth-biggest producer last year, down from fifth in 2005, according to the Energy Information Administration. In 1921, Mexico was second-biggest.
In his Sept. 2 national address, Calderon, 45, said the country has proven reserves to last nine years. Venezuela, the second-biggest oil producer in Latin America, has reserves to keep pumping at current levels for more than a century.
Petroleos Mexicanos' $15.4 billion investment plan this year covers only half what's needed to ``fully develop'' the country's oil and gas industry, said George Baker, who runs Houston-based energy research company Baker & Associates.
Pemex, as the company is known, also needs access to the deep-water drilling technology that foreign companies have to boost reserves, said Baker, who's been covering Mexico for three decades. Mexican billionaire Carlos Slim, the world's second- richest man, and former Federal Reserve chairman Alan Greenspan have criticized the investment restrictions this year.
``Oil production in Mexico is declining and declining fast,'' said Alberto Ramos, a Latin America economist in New York with Goldman Sachs, the world's largest securities firm. ``What is needed is a serious energy reform that would allow Pemex to partner with other companies.''
The peso will weaken 2.6 percent to 11.1 per dollar by March, Ramos said. The slowing U.S. economy, which is weighing on Mexican exports and migrant worker remittances, also hurts the peso, he said.
Mexican manufacturing exports have risen 7.9 percent this year, the slowest pace since 2003, according to data compiled by Banco de Mexico, the central bank. Remittances rose 2 percent in August from a year earlier, the smallest increase since the government began tracking the figures in 1995.
Calderon, who served as energy minister for eight months under his predecessor Vicente Fox, has made no direct calls to end the 1938 ban on private oil ownership, said Sergio Mendez, who manages $1.6 billion in assets at Prudential Bank SA in Mexico City. Since taking office in December, the president has instead pointed out the shortcomings of the state-run industry, he said.
That tack is necessary to build support in a country where Cardenas remains a national hero for kicking out Standard Oil and Royal Dutch Shell, said John Womack Jr., a professor of Latin American history and economics at Harvard University in Cambridge, Massachusetts.
A soldier who rose to power after the 1910 Mexican Revolution, Cardenas is featured in statues throughout the country, including a monument known as the ``Fountain of Oil'' on the capital city's main boulevard. His 1938 decision was so popular that citizens donated everything from jewelry to chickens to help the government pay for expropriating foreign companies.
``Cardenas is a kind of mythological national hero,'' said Womack. ``If you undo what he did, it would be seen as just cutting the ground out from under the country.''
Pemex may be part of the effort to bring in international investors. ``The world is changing and Mexico is facing new challenges,'' says an advertisement that started appearing this month. ``Our responsibility: That future generations have the energy resources necessary for their development.''
The company will use 60 percent of its ad budget this year to run the promotions on radio, television and in newspapers and cinemas, spokesman Carlos Ramirez said.
``They are desperately trying to generate public support, or at least trying to moderate public antipathy, to the idea of allowing foreign investment in the energy sector,'' said Chappell Lawson, a political science professor at the Massachusetts Institute of Technology in Cambridge.
Bloomberg