Mexico's sudden cut in oil prices, and its decision to review and adjust prices on a monthly basis, are symptomatic of the war of nerves developing in the newly wide-open world oil market, according to petroleum analysts.
Countries such as Mexico that are heavily dependent on oil revenues are fighting to keep their share of the market. In Mexico's case, the scramble for sales has created a new pricing policy designed to give the country uncustomary speed in responding to changes in the price of oil.
More adjustments may be on the way, some analysts say, possibly including an easing of restrictions on the sale of oil to Mexico's principal customer, the United States.
Become More Aggressive
"Everybody's trying to compete," said Jonathan Heath, director of the Econometrics Investigation Center of Mexico, a U.S.-based research organization. "Mexico has just become more aggressive. They're not going to be left behind in price changes.
Ken Fuad, an analyst for the Petroleum Intelligence Weekly, an industry newsletter, commented: "The Mexicans decided they can't defend the price of their oil. They were probably under great pressure from their customers and moved to defend their market share."
On Monday, Mexico took two steps to ensure that its customers do not desert it in search of cheaper oil elsewhere.
The state-run oil company, Petroleos Mexicanos, or Pemex, announced a price cut that averaged 90 cents a barrel, retroactive to Dec. 1. Pemex said it would review prices again at the end of January and make a further adjustment according to market conditions.
"The Mexicans found that they couldn't predict the price of oil anymore, so they did the next best thing--they'll figure it out after the fact," Fuad said.
All this became necessary when the 13-member Organization of Petroleum Exporting Countries (OPEC) decided that the prices it set could no longer be maintained because non-OPEC producers like Britain and Norway were luring away customers.
OPEC, after more than a decade of arbitrary price increases, decided instead to protect its markets regardless of the price. It is not yet clear just what percentage of world sales OPEC wants for itself.
The action opened the way for a potential price war. Prices on the open market dropped immediately. And with prices falling, Pemex was faced with the possibility that its customers would go elsewhere.
Mexico had already suffered once from failure to act. Last summer it lost half of its customers over a period of about three months because Pemex kept prices high while competitors were cutting theirs. Mexico has never been a member of OPEC but has usually followed OPEC's lead in setting prices.
The lost sales were mostly recouped, in part through stepped-up shipments to the United States, but the lesson was learned. Tardiness can mean a loss of hundreds of millions of dollars.
More Changes Hinted
Along with Monday's decision to review prices, Pemex hinted at further changes, including a possible increase in the amount of oil it will sell to any one country. Mexico, jealous of its independence, limits single-country sales to 50% of its total production.
The United States, Mexico's closest and largest market, now buys half of Mexico's oil. During last summer's sales crisis, the 50% limit was briefly exceeded, and now some analysts think Mexico may raise the single-country limit to 60%.
More frequent price changes may also be in the offing. Such flexibility will necessitate skirting Mexico's oil bureaucracy, which in part is blamed for the slow reaction that cost Mexico customers last summer.
"Mexico is under pressure from its customers," Heath, the economist, said. "They have to move quickly."
In any case, Mexico has taken the first steps to prepare for a possible price war. OPEC is committed to preserving its share of the market against producers it considers mavericks, and if prices start coming down, it is not certain who will cave in first.
British Could Be Hurt
Britain is perhaps less vulnerable to pressure than most producers because a relatively small percentage of its national income is from oil. But if prices should fall to $18 a barrel, extracting oil from Britain's offshore wells would become unprofitable.
Mexico, though, is burdened with foreign debt, and if prices sink to $20 a barrel, the country would risk insolvency. Present Mexican prices range from $22 to $26.25 a barrel, with an average of about $24. Mexico could reduce its level of vulnerability to $17 a barrel by increasing production, but that would probably involve stepping up sales to the United States, a politically sensitive step.