Mexico Strikes Back on News of U.S. Oil Suit

With headlines trumpeting an “energy war,” the Mexican government Thursday retaliated against American natural gas companies to answer charges by U.S. oil companies that Mexico dumped low-cost crude onto the American market.

Energy Secretary Luis Tellez described the dumping case filed Tuesday by several small U.S. crude oil producers as “frankly ridiculous” and said it “has absolutely no foundation or economic logic.”

The case accuses Mexico, Venezuela, Saudi Arabia and Iraq of selling oil in U.S. markets below fair market prices and seeks damages including a tariff on the four countries’ oil imports equal to a crippling $6.18 a barrel.

Saudi Arabia, Mexico and Venezuela were the top three U.S. suppliers of imported oil in the first quarter, accounting for about half the total.

The complaint was filed Tuesday by Save Domestic Oil, an Oklahoma-based group made up of small producers who were hurt by a steep decline in oil prices last year. The group called on the Department of Commerce to investigate alleged oil dumping by the four countries in 1998 and early 1999.

The targets of the novel oil-dumping lawsuit are not the only parties to question it, because oil is a commodity traded freely on world markets and its price is generally set by markets. Prices of oil from all countries generally move in unison according to world supply and demand.

Yet the majority of U.S. dumping complaints, usually involving such products as steel and textiles, are upheld. It normally takes months for dumping cases to work their way through the Commerce Department and International Trade Commission, which will investigate the claims.

If the government found that dumping by its major foreign suppliers has occurred and it imposed tariffs, the Clinton administration would be in the position of driving up gasoline prices, fueling inflation and angering consumers.

Always sensitive to perceived slights from north of the border, Mexicans reacted angrily to the dumping allegation--not least because plunging global oil prices last year imposed severe hardships on Mexico, forcing repeated budget cuts.

Reforma, the major Mexico City newspaper, declared: “Mexico and U.S. Open Energy War.” And the daily Cronica applauded Tellez in an editorial for showing that “Mexico will not give in to blackmail from economic and political pressure groups in the United States.”

Tellez told reporters Wednesday that Mexico would fight the case through mechanisms of the North American Free Trade Agreement and the World Trade Organization. He said he was in contact with the other accused countries in preparing a defense.

As a first step, he said, Mexico is retaining a 4% tariff on natural gas imports from the United States, rather than abolishing it Thursday as had been scheduled.

In May, Tellez announced Mexico would lift the tariff voluntarily July 1, four years ahead of the timetable established in the 1994 NAFTA accord. Lifting the tariff would encourage faster integration of the natural gas network between the two countries and has been welcomed by U.S. gas producers. Tellez said the tariff will remain in place until Mexico gets a favorable ruling in the oil dumping case.

Several major U.S. energy companies, including Sempra Energy International of San Diego, are lining up huge natural gas investments in northern Mexico.

Mexico still depends heavily on oil revenue from the government-owned oil monopoly, Petroleos Mexicanos, or Pemex, which generates about 30% of government income. Therefore, the government monitors closely the prices Pemex charges to make sure it is generating maximum revenue, Tellez said.

Pemex Executive Director Adrian Lajous said Thursday that Pemex sets its export oil price through published formulas that are known by market players and are directly linked to the daily crude price quotes set by the free market.

He noted that the average price of Mexican crude rose from $9.37 in the first quarter of this year to $13.71 in the second quarter. Mexico ships more than 70% of its oil exports to the U.S. market. Last year, those exports totaled 1.3 million barrels a day.

Raul Ramos Tercerio, deputy commerce secretary, said Mexico was studying several possible defenses, including the convening of a NAFTA panel that could declare the charge in violation of the legal relationship between the U.S. and Mexico.