Mexico Slashes Heavy Oil Price $1.50 a Barrel

Mexico slashed the price of its most widely used variety of oil by $1.50 a barrel Monday, only two days after warning that deep cuts in oil prices would have “serious repercussions” on the country’s ability to repay its foreign debt.

The move had been widely expected for several weeks because of the instability of the global oil market and the resulting price decline.

For instance, the price of Britain’s North Sea Brent crude for July delivery fell 20 cents on Monday to $25.90 a barrel on the European spot market, and oil traders in Tokyo reported that China has cut the price of its light Daqing oil by 60 cents to $26.75 a barrel, according to wire service reports.

In addition, Saudi Arabia’s oil minister, Ahmed Zaki Yamani, was quoted in an industry publication Sunday as warning that, unless members of the Organization of Petroleum Exporting Countries start complying with the cartel’s price and production limits, oil prices could drop below $20 a barrel, a level last seen in 1979. The average of OPEC’s official prices currently is $28.09 a barrel.

Will Reduce Revenue

Pemex, the Mexican government oil monopoly, announced that the price of the heavy Maya variety of oil would be cut to $24 per barrel from $25.50, while the price of the lighter Isthmus variety would remain at $27.75 per barrel for now.

Because Maya accounts for 60% of Mexico’s oil sales abroad, the cut will amount to an average reduction of 90 cents a barrel across the board. It will reduce Mexico’s expected oil revenue by $290 million in 1985.

In 1984, the export of crude oil, natural gas and petrochemical products by Mexico brought in $16.6 billion. Because a softer market was expected in 1985, Pemex had forecast a decrease in sales of 4%, but results have been even more disappointing than the government anticipated.

During the first three months of the year, crude oil exports declined by 10.2%. Income for the first five months of the year, Pemex said, was $330 million less than expected.

On Saturday, the government issued a statement warning that oil producing nations must seek to avoid “total disorder” in the petroleum export market. A failure to do so, it warned, would result “in a price war in which there will be no winners, only losers.”

Third World nations dependent on income from oil production, it added, are in a particularly difficult position.

“For some exporting countries, such as Mexico, which have acquired a large amount of debt, an abrupt reduction in prices will have serious repercussions in the capacity to repay, and, thus, on the international financial picture in general,” said the statement issued by the Ministry of Energy and Parastate Industry.

Praised Three Nations

The statement praised the discipline of Saudi Arabia, Kuwait and Venezuela in reducing oil production but noted that other OPEC members have failed to live up to their promises.

Indeed, Oil Minister Yamani signaled a change in the Saudi policy of shouldering nearly all of the output cuts if other OPEC members continued flouting their quotas by discounting prices, engaging in barter deals and selling on the spot market.

He told the New York-based Petroleum Intelligence Weekly that Saudi Arabia would not reduce output further and warned: “If we increase production, the prices will start dropping. . . . Prices will fall below $20.”

OPEC ministers will meet in Vienna on July 5 to try again to structure their prices and output to stabilize the world market.

Mexico is not a member of OPEC, but in the past 2 1/2 years it has consistently attended OPEC meetings and has voluntarily abided by most OPEC agreements on production, prices and export quotas.

In an official statement issued Monday evening, the government complained that oil was being sold on the global market at prices below the official level.

It also warned that the government is prepared to reduce the price of Isthmus-grade oil in the coming weeks if OPEC does not “reinforce its discipline” and if its members do not abide by self-imposed export quotas and price agreements.

No Increase Planned

Despite the reduction in price, Pemex said it has no plans to increase exports beyond the 1.5-million-barrels-a-day target that had been set earlier. The government also declared that it had never participated in the spot market and did not intend to participate in it in the future.

According to most analysts, the reduction of $1.50 in the price of Maya oil is not so deep that it will hamper Mexico’s ability to continue meeting its international debt obligations on schedule.

Mexico owes about $96 billion to foreign banks and has worked out a repayment scheme under which the country will remit roughly $12 billion to its creditors this year, mostly in interest payments.

Declining international interest rates have allowed the Mexican government to compensate for its reduced oil earnings. The government estimates that the savings in interest in 1985 alone will amount to about $1 billion.

Further reductions in oil prices, however, could mean that government revenue will shrink to the point where Mexico cannot meet its obligations to foreign creditors and simultaneously pay for essential imports of food and other goods.

A drop in global oil prices to the level of $20 per barrel, analysts say, would almost certainly spell disaster for the repayment plan on the foreign debt.