Andrés Manuel López Obrador, better known as AMLO, has been serving as the president of Mexico since December 2018. Founder of National Regeneration Revolution (Spanish: Movimiento Regeneración Nacional), a center-left party with majority in both Chambers of Deputies and Chamber of Senators, López Obrador has always clung to the old idea that just producing oil as the main energy source will turn Mexico into a first-world country and change everything for the better. He is obviously wrong.
Pemex, the state-owned company responsible for most oil operations in Mexico, has been in steady decline since the last decade, mainly because a plague of rampant corruption and a lack of investment in newer technologies. Just in the third quarter of 2019, Pemex reported a net loss of 87.4 bln pesos ($4.43 billion) and currently has more than $105.2 billion in financial debt, and an additional $77.3 billion in pension obligations. But despite all of these, Lopez Obrador sticks to his promise of reviving the state oil company; a stubborn attitude that is already pushing Mexico into a recession.
This decline got noticeably worse with the recent plunge in oil prices after the disagreement between Russia and Saudi Arabia. During the first days of April, Fitch Ratings downgraded Pemex to 'BB' from 'BB+' and its stand-alone credit profile (SCP) to 'ccc-'. This is a very negative outlook, which reflects the company's limited flexibility to navigate the downturn in the oil and gas industry given its elevated tax burden, high leverage, rising per barrel lifting costs and high investment needs to maintain production and replenish reserves. And since high taxes on the revenues of Pemex provide about a third of all the tax revenues collected by the Mexican government, Lopez Obrador's economic plans and social projects are in jeopardy.
Even more, S&P Global Ratings cut its sovereign credit score for Mexico by one notch to BBB, with the possibility of cutting it for a second time within a year or two. “Prolonged poor fiscal performance and a resulting rising debt burden, or the risk of potentially weak policy implementation, could lead us to lower the rating,” wrote S&P analysts Lisa Schineller and Joydeep Mukherji in the decision. Worryingly, López Obrador’s responses to these events are completely disconnected from reality, saying several times that he “has other data” or that he doesn’t care about the GDP because there is well-being among the population, in a country ravaged by Cartel violence, an average of 100 murders per day and an expected economic contraction of up to 8% in 2020.
However, a point of inflection in Mexican energy policy might have come on April 9th, when an OPEC+ virtual meeting took place with the goal of reducing oil production to stabilize oil prices, with the deal left on a stalemate because Mexico refused to accept the terms, even after the other 22 nations inked the pact to withdraw 10 million barrels a day from the market. In the morning of the day after, Donald Trump announced an agreement to cut American oil output by an additional 250,000 barrels per day to help Mexico contribute to global reductions. Then, just an hour later, López Obrador publicly pointed out that they shouldn’t bet everything on oil. "We will continue extracting oil, taking care of our reserves and also looking for the option of generating renewable energies, not to bet everything on oil, which is a non-renewable product, and that we should inherit to new generations. We will continue with the policy of refining oil”, said the President.
This is quite interesting because just a couple of weeks before, he was trash-talking about wind power by stating that wind turbines made the landscape look ugly, calling them “fans” and even said that he would never grant permission again for new installations. Could it be that he was severely scolded during the G20 virtual meetings? Whatever happened that changed his mind so drastically, let’s hope that he at least doesn’t interfere with the private sector investing in renewable energies.