Mexico Cuts Oil Price 90 Cents a Barrel : Responds to OPEC’s Decision to Stop Trying to Set Prices

Mexico dropped the export price of its oil by 90 cents a barrel Monday, a move that will cost it $1.35 million a day in revenue during already hard economic times.

The price cut is Mexico’s first response to a recent decision by the 13-member Organization of Petroleum Exporting Countries to stop trying to set prices. Although Mexico does not belong to OPEC, it must keep its prices in line with other producers or risk losing its share of international markets.

In order to guard itself against sudden price cuts elsewhere, Mexico also decided for the time being to set prices retroactively, at the end of each month. Therefore, Monday’s cut covered December; prices for January will be reviewed at the end of next month.

Under terms of the new arrangement, when prices drop, buyers will get a refund; when prices rise, they will be billed for the difference.

Provides Mechanism

“This action is temporary,” said a communique from Petroleos Mexicanos, the state-owned oil company commonly known as Pemex. “It gives us a mechanism to confront the current market condition, which is particularly uncertain, and supposes an elevated grade of confidence on the part of buyers.”

Mexico produces about 1.5 million barrels of oil a day and intends to maintain that level, according to the Pemex communique. That means that it will not try to make up lost revenue with higher production.

The decline in earnings that will result from the price cut will hurt Mexico’s already staggering economy. However, the government says it took oil price reductions into consideration in its budget planning for 1986 and probably will not have to cut spending on public works, the bureaucracy or social programs.

Mexico is expecting world oil prices, including its own, to fall about $3.50 during the course of 1986, officials have said in the past. Monday’s communique indicated that Mexico will try to increase the flexibility of its oil pricing to stay abreast of market trends.

For the moment, the dropping price of oil should only marginally affect Mexico’s ability to continue paying off its $96-billion foreign debt. Savings due to declining interest rates will help offset the decline in revenue from oil.

Analysts here consider that oil prices would have to reach $20 a barrel before Mexico would face insurmountable economic and debt-servicing problems. The price reductions announced Monday bring the price of Mexico’s so-called Isthmus Light grade crude to $26.25 a barrel and Maya Heavy to $22. The reduction worked out to an average of 90 cents.

Mexico supplies the United States with about one-fourth of its oil needs, the most it receives from any single nation. However, it was not clear late Monday what effect the Mexican action would have on retail prices for gasoline or fuel oil in the United States, analysts here said.

“This is a purely defensive measure,” one oil analyst said. “The Mexicans are not breaking any new ground in prices. They are merely following the market.”

Oil accounts for about 70% of the value of Mexican exports. The economy is suffering from depressed prices for other resources sold abroad, especially silver and minerals.

The oil price cuts follow closely government attempts to decrease spending in order to control inflation. During December, the government also increased the prices of fuel oil, gasoline, tortillas, bread and milk, and levied new taxes in the capital, where nearly a quarter of all Mexican citizens live.

Mexican President Miguel de la Madrid will meet with President Reagan on Friday in the Mexican border town of Mexicali. The meeting is expected to focus on Mexico’s economic troubles.

In another oil-related development, Conoco, a bellwether for the U.S. oil industry on pricing, said Monday that it is cutting the price that it will pay for a key domestic crude oil by $1 to $28 a barrel on Jan. 1. It was the first time since July 1 that a large U.S. oil company has reduced its posted price for West Texas Intermediate.