Oil prices are crucial to the Mexican government. Oil revenues (royalties and exports) supply about 35% of the government's income. In recent years, the strength of oil prices enabled the government to escape the consequences of its botched fiscal reform programme of 2001. This year, oil prices have averaged about US$24.6 a barrel, well above the US$18.35 forecast in the budget. Oil supplied 30% of total government income in the first five months of the year. As a rule of thumb, each US$1 change in the average oil price changes the government's revenues by US$600m.
Martens is not the only person nervous about oil prices in 2004. Standard & Poor's, a credit rating agency, forecast that prices will plummet next year by around US$7 a barrel, taking the average price for Mexican crude down below US$17 a barrel. Such a fall would cost about M$50bn (or 5% of total government revenues). This is equivalent to the government's combined spending this year on defence, health and law and order.
The government said, more reassuringly, that the futures markets are pointing to a price of about US$21 per barrel for 2004. The oil ministry usually uses futures prices as the basis for its annual oil price forecast. Last year, congress, on a whim, added US$1.35 to the futures price to ensure that the government would not cut spending.
Yet even a fall in the Mexican price to US$21 a barrel would have consequences, assuming that Mexico could not make up for the lower price by increasing the export volume. Currently, Mexico is exporting an average of 1.86m bpd. The cost of the price fall would be a little over half the figure forecast by S&P: M$28.5bn. This is still getting on for 3% of spending.
The problem for the government is that the debate over the budget is likely to occur just at a time when it is trying to get congress to back a package of reforms. If the government cannot buy support, but in fact has to antagonise potential supporters by cutting spending programmes, the outlook will be grim.
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