The New York Times
February 18, 2000

After Helping Oil-Producing Nations to Push Prices Up, Mexico Is Having Second Thoughts

          By SAM DILLON

          VERACRUZ, Mexico, Feb. 18 -- For two years, Mexico has
          worked with other oil producing nations to lift prices, and their
          efforts have borne fruit. But in an about face, senior Mexican officials are
          now trying to talk prices down.

          The problem is that lofty oil prices conflict with Mexico's new economy,
          propelled by exports of cars, televisions and other manufactured goods.

          "Mexico is now so integrated into the U.S. economy that it's no longer in
          Mexico's interest to rock the boat on oil prices," said Eduardo López, a
          Mexican who is an analyst at the Petroleum Finance Corporation, a
          consulting firm in Washington.

          The turnabout has put President Ernesto Zedillo's government in a ticklish
          predicament. Leaders of the industrial world are glaring at Mexico,
          complaining that petroleum prices are aggravating inflation. But the
          Mexican left is accusing the government of relinquishing a bonanza and
          giving in to the imperialists.

          That is the incendiary context for Energy Secretary Bill Richardson's visit
          to Mexico on Saturday.

          The Clinton administration has promised to take a variety of actions to
          alleviate a big increase in heating oil prices in the Northeast. Mr.
          Richardson will discuss the higher oil prices with the man who helped
          shape the trend, Energy Secretary Luis Téllez.

          At an oil industry convention today in Veracruz, on the gulf coast, Mr.
          Téllez said he hoped that oil prices, now above $30 a barrel, would soon
          drop below $25. And he paused to dwell on the new reality: that
          manufacturing is a star performer and oil a bit player in his country.

          "Mexico is mainly an industrial producer and a provider of services," Mr.
          Téllez said at a news conference. "We're not a petroleum country

          The oil equation for Mexico used to be simple: the higher the world price
          the better. Oil production contributed nearly 6 percent to Mexico's total
          economic output in 1983, but during 15 years of economic
          modernization, including the passage of the North American Free Trade
          Agreement, oil's contribution has withered to just 1.7 percent.

          So although high world petroleum prices mean that Mexico will receive
          billions of dollars in unexpected revenues this year, they also threaten to
          worsen inflation, drive up interest rates and slow world growth.

          If that happens, economists say, Mexico's losses from forfeited exports
          will far outweigh the short-term profits from $30-a-barrel oil.

          "That's what many Mexicans don't understand," Mr. López said. "People
          are still thinking in terms of national sovereignty and national interest. And
          those concepts are out of touch with the changes that have taken place."

          Oil remains a potent patriotic icon because a high point for Mexican
          nationalists came in 1938, when President Lázaro Cárdenas expropriated
          the country's petroleum industry. The identification of oil with popular
          well-being was strengthened in the 1970's, when high prices and
          discoveries of huge petroleum reserves led President José López Portillo
          to predict an end to poverty. Mexico's new challenge, he said, was to
          "administer abundance."

          If oil revenues have never eradicated poverty, they still finance the
          government: 33 percent of the government's operating funds come from
          oil taxes. And when the Asian economic crisis in 1997 cut world demand
          for energy, prices for Mexico's extra-heavy oil plunged to below $7 a
          barrel, causing a crisis here.

          When price levels are so depressed, "We as producing countries have
          every right to defend our national interests, and that's what we did," Mr.
          Téllez said in an interview today.

          In those circumstances, Mr. Téllez established secret contacts with the
          Venezuelan and Saudi Arabian oil ministers, initiating talks that eventually
          included the 11 members of the Organization of Petroleum Exporting
          Countries and Norway. The countries announced an agreement in
          Riyadh, the Saudi capital, in March 1998 to raise prices by slowing

          Early last year, prices began to rise sharply, but only since December
          have dangers become apparent. In recent days the Federal Reserve and
          central banks in Europe and Japan have warned that petroleum prices
          may contribute to inflation, and Mr. Téllez, along with the Saudi and
          Venezuelan energy ministers, have done their policy pirouettes.

          "These prices are too high," Mr. Téllez said today. He said a consensus
          had formed among the ministers who had forged the Riyadh agreement
          that production should now rise, allowing prices to pull back.

          But how soon? The ministers are to meet on March 2, but the
          production-cut commitments are to continue through March 31. Might
          the ministers decide on March 2 to short-circuit the Riyadh agreement
          and boost oil output immediately?

          "Whatever I say would be very delicate," Mr. Téllez said. "But let me put
          it this way: we need flexibility."

          Mexico's role in influencing world oil prices is surprising, given its trade
          partnership with the United States, its repeated previous refusal to take
          part in OPEC and President Zedillo's outspoken advocacy of free

          "Mexico's economic policies had been been well known," said Rogelio
          Ramírez de la O, an economic consultant based in Mexico City. "Mexico
          stood for free trade and had spoken out against price volatility.

          "Now the government has helped restrict the market to raise oil prices,
          and suddenly officials are getting messages from Washington: 'Hey!
          You're hurting us. You're fueling inflation. You're playing with fire!' And
          they're trying to back out of this with the least embarrassment possible."
          But the discomfort already appears intense.

          "It seems absurd, idiotic and contrary to our national interest that there
          could be more revenues and the government says they don't want them,"
          Cuauhtémoc Cárdenas, the presidential candidate heading a leftist
          coalition, told 10,000 supporters at a rally in Monterrey on Thursday.

          "If there was nothing to spend the money on," he said, "I could think that
          increasing the oil exports could be logical. But I've never seen anybody
          whose product is selling at a high price say, 'I want you to pay me less.' "

          Mr. Cárdenas is the son of the former president.

          "The man in the street thinks Cárdenas is right, that we need that money
          to build schools and pave streets," said Jorge Montano, a former
          ambassador to Washington.

          "They don't understand," Mr. Montano said, "that weeks from now, if
          these high prices continue, the interest rates will rise, our stock market
          will fall and we'll all sink."

          Political cartoons have lampooned Mr. Téllez as a puppet manipulated
          by the United States. "Richardson Comes to Pressure Us Over High
          Crude Prices!" said a headline in the leftist daily La Jornada.

          But if Mr. Richardson intends to urge higher production to ease prices,
          he will be preaching to the converted.

          "We're going to tell Mr. Richardson that we'll take measures that are
          good for Mexico, not only for the oil sector, but also for the growth of
          the rest of our economy," Mr. Téllez said.

          Mr. Téllez is hoping that Mr. Richardson will help him convince 100
          million Mexicans of the wisdom of forgoing short-term profits for the
          greater economic good.

          "It's important that the Mexican public understand that there is a real
          possibility that world economic growth will slow," Mr. Téllez said. "I
          hope Mr. Richardson will say this loud and clear."