Shannon K. O'Neil

Latin America's Moment

O'Neil analyzes developments in Latin America and U.S. relations in the region.

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Spillovers From Falling Oil Prices: Risks to Mexico and the United States

by Shannon K. O'Neil
December 12, 2014

Mexico, Pemex, Oil prices Refinery workers walk at one of the facility's catalytic plants, used to convert heavy hydrocarbon crude oil fractions into lighter gasoline and diesel in Tula November 21, 2013. Mexico's oil refining industry, saddled for years with bloated costs, chronic underinvestment and generous government fuel subsidies, ought to be on the verge of a bright new dawn. A shake-up last month dismantled the state-run Pemex oil and gas monopoly, ending decades of stubborn self-reliance and potentially opening the door to foreign oil companies (Henry Romero/Courtesy Reuters).

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Geopolitically, U.S. policymakers generally see high oil prices as bad and low oil prices as good for national interests. In a CFR Working Paper I coauthored with Michael Levi and Alexandra Mahler-Haug we find a sustained drop in oil prices will affect at least one of the United States’ closest trading partners and geopolitical allies negatively: Mexico.

Modeling the vulnerability of the Mexican federal budget to a range of oil price declines and assessing the different ways the government might react, we found that severe and sustained declines would force major adjustments in taxes, spending, and debt.

Here are some major findings from the paper:

  • In response to falling oil prices, Mexico will usually prefer to raise debt rather than boost revenues or cut spending, but will likely not rely only on one tool.
  • A one-year price drop should be straightforward for the Mexican government to cover with new debt—even if oil prices fall by fifty percent or more.
  • Oil prices need to fall below $70 a barrel for an extended period of time for the Mexican budget to come under severe stress.

A summary of the paper can be found here, and the full text here: Spillovers From Falling Oil Prices: Risks to Mexico and the United States.

 

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