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Mexico Suffers Because of the Price of Oil

Horacio Pozzo — Mon, 26 May 2008 14:56:55 +0000

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

They’ve Made a Bio-Fool Out of Us

Garry White — Wed, 16 Apr 2008 11:58:54 +0000

I received an invitation this week asking me to go protesting outside Downing Street last night… but shouting slogans with vegans is not really my thing.

I have never been much of a placard waver; not even when I was a student. I don’t believe that these marches achieve much – and I’d probably end up arguing with the “professional” protester types in their silly hats and fair-trade sandals.

I do, however, agree 100% with what these people were protesting about. Yesterday was dubbed Bio-Fools Day, because from now on we have to blend biofuels with all our fuels. It’s the law.

The Renewable Transport Fuel Obligation (RTFO) has come into effect. This means that – literally overnight – this country’s biofuels consumption is going to soar. All fuel suppliers will need to ensure that 2.5% of their sales in the UK now come from biofuels – rising to 5% by 2010.

This is just a blanket figure. It does not take into account where the fuel came from (“green” rainforest diesel anyone?). The whole process has been fudged and anyone with half a brain (ie virtually everyone who is not in this government) can see that these targets are dangerous. In fact, Germany has decided not to implement them at all.

We should take a leaf out of their book.

Continues below…

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Not sustainable

When The Royal Society released its report Sustainable Biofuels: Prospects and Challenges in January, its main conclusion concerned the RTFO.

The venerable Society said that the RTFO was lacking a vital part: it failed to deliver a greenhouse gas target. This meant that the legislation did not necessarily encourage the best greenhouse gas savings.

The Society argued that all the aspects of feedstock production need to be considered. That includes the use of fertilisers which give out nitrous oxides and the land used to grow the feedstock.

The report also recommended that the RTFO was extended for 20 years to stimulate the long-term investment that is needed for the industry. If we didn’t, there is a risk that we would be “locked in” to using inefficient biofuels.

The crazy thing is that we are importing ethanol made in the US in order to meet the obligation. On 11 April D1 Oils (LSE: DOO) said that it was to close its biodiesel refining plants, claiming it is unable to compete with cheap, subsidised US imports. Think of the carbon footprint of a tanker carrying ethanol across the Atlantic.

It all defies belief.

Regards,

Garry White

PS: should you know anyone else that you believe will find my musing of interest please forward this link so that they can sign up for the service.

PPS: I also write a newsletter each month called Smart Commodities UK which expands on the views expressed in Garry Writes and makes specific recommendations in the resource, infrastructure and biotech sectors. To discover more click here.