Bad play? Mexico’s oil fuels spree
This majestic ballpark is named the Grand Stadium of Chihuahua. But it could be called the House that Pemex Built.
Oil revenue from the government-owned petroleum company financed this $12-million facility, home to the minor league Chihuahua Dorados, or Goldens. The largest of five stadiums built in this baseball-crazy northern state since 2002, it boasts luxury boxes, roomy seats and space for 20,000 fans.
But not everyone is happy with this field of dreams.
“It’s too big,” said longtime fan Rafael Sanchez at a game last summer that drew just a few thousand spectators. “They should have used the money to build a hospital.”
Lofty oil prices have showered Mexico’s treasury with a tax windfall in recent years. Last year, revenue from the nation’s crude exports reached an all-time high of $34.7 billion, a 23% increase from 2005. The bonanza has spurred economic growth and helped the nation expand anti-poverty programs and beef up essential services.
It has also financed expensive gimcracks such as sports arenas and government buildings as part of the kind of spending binge not seen in decades. Public spending in Mexico nearly doubled between 2000 and 2006, vexing experts who have warned the nation to save more for a rainy day that may be fast approaching.
Mexico’s heavy crude, which fetches less than the benchmark West Texas Intermediate, has plunged 31% in price since it hit an all-time high of $64.85 in August.
For Mexico, the world’s No. 5 oil producer, it is sobering math. The nation relies on petroleum revenue to fund more than one-third of public spending, despite years of warnings from analysts about the need to diversify its tax base. Now, production at its main oil field is declining precipitously.
But that hasn’t stopped Mexico from burning through its recent oil jackpot like a spendthrift lottery winner. Petroleum sales and oil-related taxes have generated more than $335 billion over the last six years. Officials used some of the wealth to pay off foreign debt and funnel a bit of cash into a stabilization fund, which contained just over $1.6 billion at the end of September, the latest figure available.
That’s a pittance compared with Norway, which has a fraction of Mexico’s population. The Scandinavian nation, the world’s No. 8 oil producer, has socked away more than $240 billion of petroleum revenue into a fund earmarked for future pension benefits for its citizens.
In Latin America, only copper-rich Chile has been diligent about saving a good chunk of the commodities windfall that has swollen treasuries across the hemisphere.
In Mexico, like much of the region, the prevailing attitude has been: Spend it while you’ve got it.
Petroleum revenue has funded universities, built highways and provided healthcare to millions. But it has also paid for a giant flagpole in Nuevo Leon, remodeled churches in Yucatan and bankrolled swanky government offices in Oaxaca.
“We’ve spent this lottery money in an absurd manner,” said Mexico City political analyst Sergio Sarmiento in a recent newspaper column.
The distribution of more than $40 billion of so-called excedente, or surplus revenue that exceeded the government’s forecasts, is so lacking in transparency that a prominent congressman recently called on treasury officials for a full accounting.
Legislators “don’t know, much less the citizens, really where it went,” Moises Alcalde, a member of the conservative National Action Party, said in an interview with the newspaper Reforma.
Such cavalier accounting of this precious resource underscores the blessing and the curse that oil riches have bestowed on Mexico. The country nationalized its oil industry in 1938 after decades of control by foreign oil companies. The discovery of a leviathan field called Cantarell in the 1970s turned Mexico into one of the world’s petroleum powers and produced a gusher of wealth that leaders vowed to use for the country’s development.
But it has also financed plenty of waste and corruption. And it has made citizens and government indifferent to constructing a well-balanced tax system as long as more funds could be squeezed from Petroleos Mexicanos, or Pemex.
Tax evasion in Mexico is rampant. Businesses and consumers have beaten back most government attempts to get them to contribute more. It’s a big reason the nation is chronically short of funds for roads, police officers and schools. Mexico’s 2005 nonoil tax receipts equaled about 9.7% of its gross domestic product, according to government figures. That’s a collection rate lower than that of Bangladesh.
Mexico finds itself dangerously reliant on a volatile commodity to fund such diverse purchases as army boots and X-ray machines. In the first 11 months of 2006, the government siphoned $53 billion, or 73%, of Pemex’s revenue to pay its bills. This has left little for the company to reinvest in the operation and search out new oil sources.
Production at Mexico’s principal oil field is falling rapidly, with nothing on the horizon to replace it. Output at the aging Cantarell field was down more than 17% through the first 11 months of 2006.
“Oil is a finite resource ... yet the spending has grown tremendously,” said Rocio Moreno, a researcher at the independent Mexico City think tank Fundar. “Mexico’s fiscal situation is very precarious.”
Some officials appear to recognize Mexico’s vulnerability. President Felipe Calderon has vowed to broaden Mexico’s tax base and reduce its reliance on crude. Federal lawmakers last year passed legislation to commit more oil revenue to the stabilization fund and to lighten Pemex’s tax burden to free up more funds for exploration.
Still, when they needed to plug a hole in the 2007 budget, lawmakers returned to the same old well. They rejected a proposal to raise taxes on soda makers after ferocious lobbying from soft-drink bottlers. They opted instead to slash Pemex’s budget and to raid the oil fund to boost spending on infrastructure.
“Mexico is addicted to oil revenue,” said Alfredo Coutino, Latin America economist at Moody’s Economy.com, who said the nation must find other sources of revenue or cut spending if crude production and prices keep falling. “The hangover is coming.”
That’s particularly bad news for Mexico’s states, which don’t want the petroleum party to end. State and local authorities have limited taxing power. Windfall oil revenue has put unexpected billions into their hands in recent years. The law requires that those funds be spent on infrastructure. Much of the bonus has been devoted to paving roads, delivering water and expanding electricity in a nation where millions live without basic services.
But it has funded plenty of baubles and vanity projects as well.
In Chihuahua, Jose Luis Garcia, the state’s commissioner of baseball, said the five new stadiums represented an investment in family values. Sitting in the largely vacant Grand Stadium of Chihuahua while the Dorados lost to their intrastate rivals, the Algodoneros, or Cotton Growers, of Delicias, he said he envisioned a day when the massive ballpark would be routinely packed with cheering families. “We built for the future,” he said.
Dorados fan Fernando Ordonez said he doubted he would see such a spectacle in his lifetime. In the meantime, the septuagenarian said he liked having plenty of room to stretch out.
“This is just like a SUV,” he said with a grin. “A big, expensive one.”