Mexican reliance on exporting oil as a primary source of revenue is an untenable long term situation, says Gregor Macdonald.
So, the country should bite the bullet early and cut off oil exports now. It would cause some short term pain, but in the long run, the country would be better off.
Oil production in Mexico is fading fast, but domestic oil consumption is steady, if not rising. At some point, possibly by 2012, the nation’s domestic supply will be less than its demand. At that point it will have to eliminate exports.
When that happens, Mexico loses a major source of revenue. Revenue from oil is already down 50% for the year in Mexico, forcing it to borrow money to cover budget shortfalls.
Borrowing would be a fine solution, if Mexico had more oil. By the time the price jacks up to $110-50 range, it might be too late for Mexico, since it will have pulled most of its exportable oil from the ground. It will have to print up money to pay off its debt. That’s an OK solution for a respected economic powerhouse like the U.S., but less so for Mexico.
Rather than crank up debts, Mexico should go into conservation mode. Here’s Gregor’s three reasons the nation should stop exporting now:
- One, the government could make a staged exit of their own choosing, thus stripping out the volatility in oil export revenues, which are going to end anyway. This would encourage planning.
- Two, the country could start facing up sooner to the need to make products with their remaining oil surplus, rather than selling the precious resource as a cheap, undervalued raw good.
- Three, the announcement would send a wake-up call to the world oil market’s, and would likely effect the crude oil futures curve, thus pulling up current prices a bit higher.
Business Insider Emails & Alerts
Site highlights each day to your inbox.