Introduction
Mexico’s public finances could benefit from a rise in oil prices, according to estimates by the Secretariat of Finance and Public Credit (SHCP) in the General Criteria for Economic Policy.
Current Scenario
The Mexican government, led by Claudia Sheinbaum, anticipates collecting 1.142 trillion pesos from oil revenues this year, with an estimated price of 57.8 dollars per barrel.
Potential Impact of Geopolitical Events
However, recent geopolitical events, such as the U.S. bombing of three Iranian nuclear facilities and Iran’s subsequent call to close the Strait of Hormuz—a crucial shipping lane for oil tankers—could drive up oil prices. Prior to the U.S. attack, the Mexican Institute of Executives in Finance (IMEF) had estimated that the conflict could push Mexican crude prices to 100 dollars per barrel.
As of June 18, the Mexican mixed crude price had reached 70.23 dollars per barrel. This year, oil production has fallen short of expectations, with April output at 1.69 million barrels daily—9.4% less than the planned 1.87 million barrels.
Positive and Negative Scenarios
Jorge Cano, coordinator of the Public Spending and Accountability Program at Mexico Evalúa, outlined both positive and negative scenarios for public finances given the current situation.
Positive Scenario
In a positive scenario, higher oil revenues would aid the government in a year marked by public spending cuts to achieve fiscal consolidation. This increased petroleum revenue would make it easier to reduce the fiscal deficit to 3.9% of the Gross Domestic Product (GDP).
Negative Scenario
On the downside, Cano noted that a rise in oil prices also increases gasoline costs. Consequently, the government might activate tax stimuli that could result in greater losses from the Special Production and Services Tax (IEPS) than the benefits gained from additional petroleum revenues.
“Based on history, the negative scenario is more likely. With rising oil prices comes higher gasoline costs, and the government has a tendency to provide subsidies—meaning not collecting the IEPS tax or even offering additional stimuli, as seen in 2022,” Cano stated.
In 2022, facing high oil prices, the government not only fully applied the IEPS tax stimulus for gasolines but also created a complementary fiscal stimulus to soften the increase in gasoline prices.
That year, approximately 269 billion pesos were gained from extra petroleum revenues. However, the gasoline tax stimuli cost 397 billion pesos, meaning the excess petroleum revenue did not fully compensate for these costs.
Pemex Benefits
Despite a negative scenario, Pemex would still benefit from rising oil prices, according to Mexico Evalúa’s researcher.
“Pemex will benefit from higher oil prices, as the petroleum revenue is currently distributed in favor of Pemex through the Bienestar Petrolero scheme, where 70% of the income goes to Pemex and 30% to the federal government. If fiscal stimuli are implemented, it’s the federal government that loses, not Pemex,” Cano explained.
Pemex, one of the most indebted oil companies globally, has frequently received support from the federal government to address its financial situation.
For this year, according to the Federal Budget of Expenditures (PEF), a 136 billion pesos budget line was approved for Pemex, primarily to help pay off the company’s debt.
By the end of the first quarter, Pemex had used 80 billion pesos from this line, representing 59% of the total resources.
Key Questions and Answers
- What is the expected impact of rising oil prices on Mexico’s public finances? A rise in oil prices could benefit Mexico’s public finances by increasing petroleum revenue, which would aid in reducing the fiscal deficit.
- How might higher oil prices affect gasoline costs and government revenue? Higher oil prices also increase gasoline costs, potentially leading to greater losses from the Special Production and Services Tax (IEPS) due to government-provided subsidies.
- Which company is likely to benefit from rising oil prices? Pemex, Mexico’s state-owned oil company, is expected to benefit from rising oil prices due to the distribution scheme of petroleum revenues.
