Versión Español
Lopez Obrador would like to be Hugo Chavez, but he can’t. He simply doesn’t have the money that Hugo Chavez had at his disposal. Nor does he have an oil company that sustains his mammoth projects or can sustain them in a hypothetical future. On the contrary, PEMEX is a burden on the shoulders of his administration.
Weak public finances and a PEMEX turned into a bottomless and hopeless barrel are two parallel phenomena. Since resources are limited, the federal government’s new expenditure bill, which is under discussion in congress notes the lowest level of public investment in nearly a century. And it is even worse: for every 100 pesos that the Mexican state will invest in infrastructure during 2020, 50 pesos will be for PEMEX, three for health, and two for education.
Lopez Obrador wants PEMEX to increase its production significantly, but without giving it the money it needs to because he simply doesn’t have it. Lopez Obrador hopes to get PEME to finance all his projects. The cost of his obsession with the company has been children without treatment for cancer and adults with AIDS without medicines, women persecuted and left without shelter, bureaucrats fired without any benefits, and many more human tragedies. The budget constraint that the president calls “austerity” against corruption benefits a company burdened by decades of ineptitude and dishonesty.
In his desperation to save PEMEX (and for the company to save its government in turn) Lopez Obrador lied when he said the country would not be indebted any further. Thus, a few days ago, he had to borrow seven and a half a billion dollars to pay on time the maturities of PEMEX’s debt in 2019 and 2020.
Lopez Obrador indeed received the most indebted oil company in the world and placed it in the hands of inexperienced officials who in a few weeks lost the confidence of the markets. In this scenario, he can only borrow to pay interest, which is unfeasible in the long run. Refinancing is only sustainable in the long term if you expect to generate more money than you ask for. If, on the other hand, you start generating less money (as is happening today), eventually the situation will be unsustainable, which is precisely what is already happening with PEMEX. Thus, the oil company will at some point lead Lopez Obrador (and the country) into bankruptcy. The only solution then will be to sell assets to cover its obligations, reduce its labor liabilities via layoffs, and even so, it is most likely not enough to generate enough money to meet its mounting commitments.
All this is what is currently happening to PEMEX: it is no longer profitable enough to cover its liabilities (the price of oil has fallen, and all signs indicate that it will continue to fall). Its extractive production has fallen hopelessly, and that is its primary source of income, while refining has never been a real business. In strict economic rational terms, it would be cheaper to buy all the gasoline in the United States.
There is no doubt that in the distant and recent past, the administration of PEMEX has been terrible, which is why it has reached its current situation. Otherwise, it would not be as heavily indebted as it is. But it is also undeniable that Lopez Obrador’s administration is doing nothing to get out of this current situation, but seems to be stubbornly digging deeper under its feet.
PEMEX is simply not sustainable, something that has been said in every way and by all the serious analysts in this country. Eventually, there will be a drop in its credit rating, which in turn will drag down the country’s rating. In a short time, it will be the country risk that is degraded, which will have an impact on the exchange rate and domestic consumption, since many of the things we consume are imported.
PEMEX today is basically a machine that burns billions of dollars. Lopez Obrador should be realistic and pragmatic in breaking it or selling it in parts. The only way to avoid this is to resume oil field auctions or allow investment with partners, all of which the Mexican government refuses to do for ideological reasons (which does not seem to change in the near future).
Projects such as the Dos Bocas refinery will end up becoming other bottomless barrels and will further aggravate PEMEX’s financial situation, all in search of the Lopez Obrador’s dream of energy self-sufficiency although the worldwide trend is to reduce dependence on hydrocarbons and move towards other energy sources.
The only consolation, if any, is that Lopez Obrador will not have the resources to become the Mexican version of Hugo Chavez. He just doesn’t have what it takes. The good thing is that given the terrible situation in which Chavismo left Venezuela (and Kirchnerismo left Argentina or Sandinismo left Nicaragua), any other alternative is the lesser evil.
