Last year, Mexico spent $1.09 billion to hedge its oil sales at $49 per barrel. (In 2014, Mexico spent $773 million to hedge at $76.40.) The current budget assumes $50 per barrel and production of 2.247 million barrels per day. That is, it assumes $41 billion in gross oil revenue. The remaining $1 per barrel is hedged by a federal savings fund.
Right now, this is looking like a pretty good bet. Mexican crude is trading around $25 per barrel. The below figure (from SHCP) shows Mexican federal revenues as a % of GDP from 2000 to 2015. It would look much worse in 2015 without the hedges:
But if revenues are holding up and revenues are hedged, it does make the announcement of small cuts discussed here even more mysterious. Why?
Well, there would seem to be three reasons. The first is stupid, although I suspect that Mexican policymakers believe it: they are chasing the confidence fairy.
The second reason has more serious implications. The government may believe that low prices will persist for more than a year. If that is true, then it setting the stage for more serious cuts ahead. The good news is that they are also setting themselves to be pleasantly surprised if oil prices rebound.
But the third possible reason is the most serious of all. Despite the efforts of the past two CEOs, Pemex is an institution in trouble. The company has been losing money after taxes; now prices are so low that it is just plain losing money. That is why the administration replaced the administration two weeks ago. Emilio Lozoya was out; José Antonio González came in from heading up the Social Security Institute. Lozoya reorganized the company into clear upstream and downstream subsidiaries (making analysts lives much easier!) and squeezed out some inefficiencies. But he could not put the company in the black.
González is not going to have it any easier. In fact, falling prices may have a terrible feedback: less revenue leading to declining investment leading to even less revenue. There are many costs to be cut in Pemex, but those involve taking on powerful unions ... and layoffs would not go over well in the states of Hidalgo, Tamaulipas and Veracruz, both of which are holding state elections this year. So the government might be thinking that Pemex is unfixable. In the long run, that is fine. But over the next few years, it poses a serious problem for the federal government.
Pemex accurately claims that its lifting costs are around $10 per barrel, but that does not take into account the money the company needs to spend to keep up its reserves. That would drive costs up to something more like $23 per barrel.
In short, the government may be thinking that even if oil prices rebound, revenues from Pemex will do so more slowly.