This article analyzes the possibility that the Mexican government may not reach its revenue goal of 936,708.4 million pesos from oil production for the current fiscal year (2021). The Mexican government has projected a 2021 level of crude production of 1.857 million barrels per day (MBD) while last year’s production stabilized at around 1.691 MBD. Therefore, the 2021 production level is overestimated by 9.8 % (166 MBD). Furthermore, in 2021, we expect considerable price volatility due to the uncertainty of global economic growth in light of the health emergency. Secretary of the Treasury (Hacienda) Arturo Herrera has seemingly acknowledged this shortfall in his call for technical discussions to increase government revenues through tax reform. Other policy options may include efforts to reduce tax evasion, further reductions in public spending, increased public debt, or a combination of all four instruments.

Context

The Mexican government calculates its annual revenue based on a series of macroeconomic indicators (see table 1).

The values of these variables form the basis of the estimate of the Mexican government’s income and expenditure budget. If any one of these variables deviates greatly from its estimated value, the government would have to adjust its revenue estimate and probably its public spending plans.

Image Credit

Ricardo Mora-Tellez, Wilson Center

 

Analysis of the Mexican government's 2021 fiscal year estimate of oil revenue and production

The Mexican government estimated its 2021 total income at 6,295,736.2 million pesos, with 30.3% derived from Income Tax (1,908,813.4), followed by 23.8% from Taxes on Production, Consumption and Transactions (1,497,171.0), 19.0% from Other Income Sources (1,196,253.8), 14.9% from Oil Revenue (936,708.4), and an additional 12.0% from Loans (756,789.6) (See Graph 1).

Image Credit

Ricardo Mora-Tellez, Wilson Center

Graph 1 shows that almost 1.5 out of every ten pesos depends on Mexico's oil production and the price of a barrel of oil.

Oil Revenue Estimates

For fiscal year 2021, the Mexican government estimates its total oil revenue at 936,708.4 million pesos based on production of 1.857 million barrels a day (MBD) and an average price per barrel of $42.10 USD. In order to reach this revenue target, two conditions must be met; oil production must increase to 1.857 MBD and the average price of Mexican oil must increase to $42.10 (see table 1). Since both must be met, we will analyze each, starting with production.

Mexico’s 2021 Oil Production

In order to analyze the Mexican government’s oil production goal of 1.857 MBD, we will compare the annual production of the first trimester of the years from 2016 to 2021. This allows us to: (1) include 2021 production from January to March in the analysis; and, (2) to compare the entire series based on production during only the months of January-March.

Image Credit

Ricardo Mora-Tellez, Wilson Center

For years, the Mexican government has financed a good part of its public spending through oil revenues. However, in recent years, the share of oil revenues has decreased due to the decline in oil production. Graph 2 shows that oil production decreased from 2.544 MBD in 2013 to 1.668 MBD in 2019. In other words, Mexican oil production decreased at an annual rate of 6.7% from 2013 to 2019.

In 2019, though the downward trend in oil production stopped, production stabilized at around 1.691 MBD, which falls below the 2021 goal of 1.857 MBD by 9.8% or 166 MBD.

Mexico’s Average Price of Oil (2021)

The Mexican government estimates an average price of $42.10 USD per barrel in 2021. In order to assess whether this estimate is on target, we can compare it to the 2019 and 2020 averages (Graph 3). That is, the year before the pandemic as the upper limit ($56.13 USD per barrel) and the year of the pandemic as the lower limit ($35.70 USD per barrel). Since the average price is $45.90 USD, the estimated price for this year, coming in 8.3% lower, is not overestimated. However, this is likely to be a volatile year due to the uncertain impact of the health emergency on global economic growth.

Image Credit

Ricardo Mora-Tellez, Wilson Center

The extent to which oil prices will rise is dependent on whether the world's largest economies have the COVID-19 pandemic under control.

Conclusion

The level of oil production does not show an upward trend; therefore, the government may not reach its revenue target. Today the level of production is below the goal established by -166 MBD; this difference is equivalent to 9.8%.

In addition, this income goal depends on the performance of the world economy, which will be impacted by the volatility caused by the COVID-19 pandemic.