Tight Budget to Drive Debate on Energy Policy

SourceMex Economic News & Analysis on Mexico, November 7, 2001 | Go to article overview

Tight Budget to Drive Debate on Energy Policy


The prospect of tight government revenues will continue to drive the debate on Mexico's energy policies during the remaining five years of President Vicente Fox's administration.

In a master plan presented to Congress in early November, Fox called for easing restrictions on private investment to attract much-needed capital to strategic sectors like natural gas, petrochemicals, and electrical power. Fox did not offer a timetable for introducing related legislation, but presented the blueprint to meet the legal obligation that each incoming administration present its energy policy before completing one year in office.

The Fox plan argues that tight regulations have to be relaxed to attract the US$120 billion in investments needed by the energy sector during the next five years. Of this total, US$48 billion would be directed toward exploration and production, US$18 billion for the refining process, US$20 billion for natural gas, and US$34 billion for electricity.

The document said the funds approved annually in the federal budget are "clearly insufficient" to meet these needs.

Fox to seek compromises with opponents in Congress

But Fox is expected to proceed cautiously with his proposals, given strong opposition from the center-left Partido de la Revolucion Democratica (PRD) and some members of the former governing Partido Revolucionario Institucional (PRI) to proposals to open up Mexico's strategic energy sectors to private investors, especially when many of these investors will likely be foreigners. The PRD and PRI want to keep key decisions on the petroleum, gas, and electric sectors in the hands of government entities like the state-run oil company PEMEX and the Comision Federal de Electricidad (CFE).

Responding to those concerns, the president has promised to work with legislators on a plan that would promote increased private investment in the energy sector without actually ceding control of PEMEX and the CFE to private investors.

One key proposal, which is likely to gain support from both reformers and traditionalists, would change the tax structure of PEMEX and the CFE. Under the plan, the two state-run agencies would gain greater control of their revenues by not having to pay burdensome taxes to the federal treasury. "In the last three years, PEMEX's tax burden has been much larger than its surplus, forcing the company to go into debt to pay taxes," said deputy energy secretary Francisco Barnes de Castro.

The CFE has faced a similar situation, having to absorb the brunt of subsidies for electrical rates. "These situations have resulted in the undercapitalization of both PEMEX and the CFE," Barnes said.

Fox, Congress at odds over oil-export reductions

While the president focused on long-term plans for the energy sector, debate has been fierce regarding Fox's handling of short-term energy policies, particularly since budgetary questions are involved. The Fox administration has come under attack from many PRD and PRI members for not coordinating its oil-production and export policies more closely with the Organization of Petroleum Exporting Countries (OPEC), particularly in light of a recent plunge in global prices.

OPEC has attempted to influence Mexico's oil policies through Venezuelan President Hugo Chavez, who met with Fox in Mexico City in late October. The two leaders held a cordial meeting, with Fox promising to leave his options open but also insisting on Mexico's independence from OPEC decisions.

"We are satisfied with our current [production] levels," Fox said. "But we will consider an adjustment whenever we deem it necessary."

The Secretaria de Energia (SENER) hinted that a cut in production was possible in the near future. "We have to be very careful to ensure that prices do not fall to levels that will damage our economy," Lourdes Melgar Perez, SENER's director of international affairs, said in early November. …

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Tight Budget to Drive Debate on Energy Policy
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