The conversation of López Obrador and Trump unlocked Mexico’s refusal to cut, but the Government of Mexico has not wanted to clarify in exchange for what
No one saw Mexico coming. The Latin American country was yet another guest at the summit of expanded OPEC, an intermediate oil producer that would join the global effort to stabilize crude prices at whatever cost. But Mexico had other plans. Once the major oil powers were closing in on an agreement for everyone to cut 23% of their output, Mexico raised its hand and refused. What was expected to be a two-day summit lasted a couple more, until Easter Sunday. Mexico took a risky leap in opposing Saudi Arabia, the world’s leading oil producer, and ultimately landed a deal with the backing of the United States , the consequences of which are yet to be known.
The expanded OPEC sought that all participating countries cut 23% of their production to, together, boost the price of a barrel that was reaching historically low levels. Mexico was to cut 400,000 barrels of crude oil a day, from its total production of 1.7 million barrels a day. Linked by videoconference, the Minister of Energy, Rocío Nahle, asked for her turn and released the news: Mexico would only be willing to cut a quarter, some 100,000 barrels a day. All had agreed, until Mexico refused. Nahle also left the talks without warning Thursday afternoon, and nerves strained in the Middle East. The Mexican drama had begun.
Mexico is a country with an oil tradition and whose history linked to crude oil has been troubled. The country maintains most of its production in Petróleos Mexicanos (Pemex), the state-owned company, and since 2014 allows a small participation of the private sector in the industry. Pemex has suffered a drop in production for more than a decade and has become the world’s most indebted oil company – $ 110 billion, until the end of 2019.The Mexican president, Andrés Manuel López Obrador, has wanted to boost the national industry since he came to the Government in December 2018, so he has frozen the projects for the private sector and has thrown all the fuel into the resurgence of Pemex, with contributions of money public included. The health of Mexico’s public finances are always linked to Pemex.
Mexico’s unusual turn at the expanded OPEC summit reflects López Obrador’s vision: a production of 1.3 million barrels per day – a level not seen since 1992 – as OPEC had proposed, left Mexico without the possibility to continue with the energy policy of the president who was born in Tabasco, the heart of the country’s oil industry. “If production drops so much that means that the president’s oil dream is no longer fulfilled,” says energy consultant Gonzalo Monroy. The flagship of that project has so far been the construction of a refinery in Dos Bocas (Tabasco) for $ 8 billion. The defense of that plan reached the OPEC table. “The best foreign policy is a good internal policy”,
In the history of Mexico the United States has always been. So when OPEC rejected the Mexican proposal, Donald Trump got on the phone. “President Trump began to read me the names of all the countries that had accepted, and says: ‘Only Mexico did not accept.’ And I already explained why and I made the proposal, which fortunately accepted it with this compensation from them, ”said López Obrador on Friday. Thus, the United States promised to cover Mexico’s shortfall without delving into the how, but assuring that somehow Mexico was going to pay for it. The exchange currency is still a mystery.
Saudi Arabia refused to accept the Mexico-United States deal, arguing that if it granted the exception, other countries would seek to escape. Mexico did not move one iota, faithful to the Mexican president’s custom of being immovable, and questions grew about how a country with declining production and without significant representation in the market he dared to even raise a David against Goliath. He risked being kicked out of the group or subject to some penalty. The confidence of Mexico could be sustained, in part, by the so-called oil hedges, a kind of insurance for its production that protects the income of the Mexican Treasury, which this year guarantees a barrel at $ 49; or on the calculation of the decline of its main oil fields: Cantarell and Ku Maloob Zaap; or just intuition.
“The strategy that President López Obrador designed worked,” Foreign Minister Marcelo Ebrard announced this Sunday to fuel the epic. The pact to cut 9.7 million barrels in May and June only recognizes 100,000 barrels a day by Mexico, which kept the United States as its guarantee. If López Obrador’s strategy worked, the Mexican export mix may recover from its historic decline (now valued at $ 16.54), Pemex’s finances and credit rating will continue to float, and the oil project will be safe. “A production reduction strategy would have given him more leeway for Pemex’s rating to remain at least as it is,” says Monroy. The risk for Mexico at this summit has been as high as the uncertainty about its future.