Mexico has said good bye to 40% of its state funding by 2018 by letting PEMEX keep an increasing share of its earnings starting in 2009.  As the analysis below speculates this attempt to enable PEMEX to finance efforts to find more oil to replace its depleting fields could create a fiscal crisis unless lawmakers get the courage to pass new taxes or other revenue sources.  Stay tuned.

Meanwhile, the new policy is being attacked by leftist politicians led by former Lopez Obrado who barely lost the last presidential election and seems to be growing desperate for power.  He could fuel more violence in one of Mexico’s two domestic wars.  One war is between the drug running community and the police (which recently caused the firing of many cops in Mexico’s elite police counter-drug division because they were being bribed at prices nearing $500,000 per day).  The other is between the police and leftists in Chiapas and elsewhere.  It looks like Mr. Lopez Obrador, the main leftist, may use the new oil law as an excuse to rally the peasants.  As we know, desperate men can make really bad decisions.

I think Mexico could become a failed state in five years unless the present government is somehow able to find substitute revenue sources for the diverted PEMEX funds and unless they are able and willing to win the two domestic wars.   We may not know what they will do about financing the federal budget for another year or so.

MEXICO: Oil Reforms Leave State in the Red

By Diego Cevallos
MEXICO CITY, Oct 29 (IPS) - The oil industry reforms approved by the Mexican Congress and applauded by the government and most of the country’s parties, with the exception of factions on the left and part of the business community, will deprive the state of a source of funding that currently finances 40 percent of the public budget.
“Good for the oil industry, which will now have more funds, but the lack of an alternative source of financing for the state is very worrisome,” Roberto Gutiérrez, an expert on energy issues at the Autonomous Metropolitan University (UAM), told IPS.
From 2009 to 2016, the flow of funds from the state oil monopoly PEMEX to the state coffers will gradually be reduced, according to the reforms approved Tuesday by the lower house of Congress after six months of heated debate. (They passed the Senate last week).
The hope is that by increasing the proportion of revenues left in the hands of the oil company, Pemex will improve its performance, which has been undermined by a lack of funds and up-to-date technology, while output has steadily fallen and reserves have shrunk (according to official figures they will last less than nine years).