Production Hike to Minimize Impact on Revenue : Mexico Moves to Offset Cut in Oil Price

The Mexican government Tuesday attempted to minimize the effect of its decision to reduce the price of its lightest grade of crude oil by $1.25 a barrel, even though the action will reduce annual export revenue by $300 million.

The move, which was announced Monday night, had been expected since last week, when the Organization of Petroleum Exporting Countries decided in Geneva to reduce its price by $1 a barrel.

Mexico was present as an observer at the OPEC conference in Geneva, and in consultation with others, notably Venezuela, it agreed to lower the price as a way of holding the line against a further decline in prices.

Pemex, the Mexican government energy monopoly, will reduce prices and at the same time abandon the policy it adopted last November, along with OPEC, of cutting back production as a way of maintaining stability in the global oil market. Pemex had reduced its exports from 1.5 million barrels a day to 1.4 million barrels to demonstrate its willingness to cooperate with OPEC, even though it has refused for years to become a member of the cartel.

Beginning this month, Pemex announced, it will not only go back to exporting 1.5 million barrels a day but will also sell a sufficient quantity over that level to make up for the loss of revenue over the past three months.

The decision, retroactive to Feb. 1, means that the price of a barrel of Mexican Isthmus crude will be reduced from $29 to $27.75. The heavier crude known as Maya will continue to be priced at $25.50 a barrel. Mexican oil is sold on a package basis, 55% Maya and 45% Isthmus.

The sale of oil abroad is Mexico’s most important source of financial support at a time of fiscal austerity. Projected earnings for 1985 are about $15.8 billion, of which $11 billion to $12 billion will be used to pay the interest on foreign debt. The remainder will be used to pay for imports.

A significant drop in oil prices could shake public confidence in the economic recovery program of President Miguel de la Madrid. Thus, the announcement of a price reduction was accompanied by a statement that the loss of $300 million in revenue represents only 1.9% of the projected earnings of Pemex and only 4% of Bank of Mexico’s present hard-currency reserves.

Excelsior, a morning newspaper that often reflects government thinking, said the price reduction was unwelcome news, but it added that the move was “necessary and inevitable.”

Fidel Velasquez, Mexico’s most important labor leader, said the decrease in revenue would shrink the government’s budget and could have an adverse impact on the welfare of Mexican wage earners.