With oil prices climbing to higher than $133, to what extent does Mexico benefit from this? Is it taking advantage of this special time?

Buenos Aires, Argentina May 22, 2008

How does one control the inflationary trends that are happening worldwide? Surely, this is not a simple question to answer, even for specialists. Every time my colleagues and I meet, we cannot reach an agreement regarding how to control inflation, particularly in a context where international energy and food prices keep increasing.

One of the conclusions we can reach without much discussion is that strong food and energy price increases are striking all world economies, and that net commodities exporters are benefiting from these price spikes.

The second conclusion that we are able to gather from this situation is that countries having great natural resources, that are not yet net commodities exporters, now have a great opportunity to gain from the current economic situation.

This is exactly the circumstance that Brazil finds itself in currently. For two decades now they have had an effective policy regarding oil (fossil fuels), but now they are looking to expand their interests in biofuels and in developing policies to promote the cultivation of grains. In this way, Brazil is demonstrating a way not only to limit dependence on imported commodities, but also how to benefit from the current high international prices of commodities.

Thinking now of Mexico, the first thing I ask myself is: to which extent are these high energy and food prices affecting the Mexican economy?

Due to inflationary concerns, on the 16th of May, the Bank of Mexico decided not to modify interest rates. Inflationary pressures keep mounting along with concerns regarding a potential recession in the US: “Inflationary pressures in the world and in Mexico keep increasing and it is a growing concern.”

The Bank of Mexico’s governor, Guillermo Ortiz Martínez, noted a few days later: “There are still inflationary pressures because processed food prices could still go up, even though there is a more stable grain price.”

Inflation is worrying Mexico and there are concerns about a potential economic slowdown there as well… But there is also another situation that worries Mexico and this one is related to the development of energy reform there.

Reform within Pemex, the nation’s oil company, is at the center of this debate. Pemex plays a vital role in Mexico’s economy due to the huge profits that it generates. These profits, in turn, are used to fund areas within the infrastructure of Mexico such as education, security and other social programs.

For the first quarter of the year, 45% of the country’s income came from Pemex. This contribution by Pemex to the state treasury is particularly significant because oil production is decreasing and the known reserves have diminished significantly in recent years.

Pemex’s production peaked back in 2004, but ever since then it has consistently declined. Its oil production has fallen 1.3% in 2006, another 5.3% in 2007, and during the first quarter of this year it fell 7.8% below production levels during the same period last year.

However, it is most worrisome that between 2000 and 2007 the proven oil reserves in Mexico fell 54%, according to data from Pemex’s own annual stock report.

And while oil prices keep on skyrocketing (breaking the $130 barrier) Mexico is losing a great opportunity. With these high prices, now is the time for Mexico to begin looking towards investing in its future. However, the bad economic policies of the Mexican government are leading to a lack of any such investments at the current time.

But there is still time to change history by changing these policies; and to accomplish this Mexico needs massive amounts of capital for investing in its future. Thus the key issue for Mexico to resolve, and quickly, is how to find this necessary funding.

And one cannot forget that Mexico is not the only country in the region that is squandering its future growth opportunities. Argentina is as well and I will talk to you more in depth about this matter tomorrow. Today I have an opportunity to hear several renowned Argentine economists speak at an interesting conference at the Sheraton Hotel. Tomorrow I will specify their ideas and forecasts regarding Argentina, for you, our Latinforme readers.

We will meet again tomorrow,

Horacio Pozzo

Editor’s note: With oil prices climbing to higher than $133, to what extent does Mexico benefit from this? Is it taking advantage of this special time? Enjoy the following article and send your comments to: paola@latinforme.com or on our website at www.latinforme.com