The situation in Mexico’s oil industry continues to rapidly disintegrate as falling oil production and rising costs resulted in an $18 billion fourth-quarter loss for the state-run oil company, PEMEX.  Part of the reason for the huge financial loss at PEMEX was the fall in the value of the Mexican Peso.  While PEMEX’s costs are in Pesos, it sells crude oil and purchases petroleum products in Dollars.  Because the Mexican Peso declined 8% versus the Dollar, it put a huge strain on the company’s year-end financials.

Regardless, Mexico’s oil production continues to fall due to the natural decline from resource depletion.  However, as Mexico’s oil production falls, its net oil exports have dropped significantly as well.  Thus, falling net oil imports translates to less revenue for PEMEX.  According to BP’s 2017 Statistical Review, Mexico’s net oil exports hit a low of 587,000 barrels per day (bd) in 2016, down from 1,867,000 bd in 2004:

While Mexico’s oil production declined from a peak in 2004, its domestic consumption has remained basically flat.  Which means, Mexico’s net oil exports have fallen by more than two-thirds in just 12 years.  Unfortunately, it looks like Mexico’s oil production will be down another 10% in 2017.

The next chart from shows Mexico’s net oil exports since 1960:

Mexico’s total oil production is shown in the grey area, while consumption is displayed by the black line.  The green area reveals the country’s net oil exports.  As we can see, Mexico’s net oil exports peaked in 2004 at 1.86 million barrels per day (mbd) and are now likely below 0.5 mbd.  Falling net oil exports are a death-knell to the Mexican government because it receives a lot of its revenue from PEMEX.

Furthermore, the United States has received a lot of its oil from Mexico over the past three decades.  However, this has all changed in the past two years as Mexico has switched from being a net exporter to a net importer of crude oil and petroleum products from the United States:

Mexico’s net oil and petroleum product exports to the United States peaked in 2006 at 1.6 mbd and had turned into net imports of 603,000 bd in December 2017.  Again, this is terrible news for PEMEX and the Mexican economy.  While the United States can print Dollars to its heart’s desire, as it is still the world’s reserve currency, Mexico does not have the same luxury.

If we take a look at PEMEX’s financial statements, we can spot the unfolding trouble:

As mentioned at the beginning of the article, PEMEX suffered an $18 billion net income loss in the fourth-quarter of 2017.  Not only did PEMEX’s cost of sales increase significantly, but it also suffered a $7.6 billion Foreign Exchange loss due to the depreciation of the Peso.

Now, the next table shows PEMEX’s Cash Flow.  There are two important highlights in the table below:

PEMEX’s interest expense was $5.9 billion for 2017.  However, their total net interest expense was $5.4 billion.  That is one hell of a lot of money to pay those who hold your debt.  The second important figure is the cash flow from operations of $2.9 billion was less than the $4.3 billion in capital expenditures.  PEMEX spent $1.4 billion more money in producing their oil and gas than they received from operating cash.   Their negative free cash flow and other items pushed PEMEX’s long-term debt to a record $95 billion in 2017:

The more debt PEMEX adds to its balance sheet the higher will be its annual interest expense.  And, to make matters even worse, Mexico’s oil production will continue to decline right at the time its debt is exploding.  It will be impossible for PEMEX to pay back its debt, so it is logical to assume that the state-run oil company will likely go bankrupt in the future causing extreme difficulties for the Mexican Govt and economy.

Now, I am not singling out PEMEX or Mexico’s oil production as what’s going wrong in the global oil industry.  ALL public and state-run oil companies will go belly-up… it’s just a matter of time.

We must remember when Egypt switched from being a net exporter to net importer of oil; the Arab Spring occurred the very next year:

With the rising food costs during the 2008-2009 inflationary period in Egypt and on top of the country becoming a net importer of oil in 2010, the government was powerless to deal with the crisis.

Lastly, as Mexico’s oil production continues to decline, its state-run oil company, PEMEX, will likely default on its debt.  This will cause severe problems for the government and the domestic economy.  However, what happens in Mexico as it pertains to oil, will not stay in Mexico.  The U.S. and global oil industries are in serious trouble.  While these problems won’t impact the world this year or next, it will become a disaster over the next decade.


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  1. Petedivine | March 1, 2018 at 3:13 pm |

    Powerful article. We need to keep in mind that without cheap energy Mexico’s ability to export food stuffs to the U.S. and to import finished goods will decline impacting U.S. food prices and corporate profits. Everyone reading Steve’s articles knows that agriculture is an energy intensive business. I also think the energy crises in Mexico will have a profound effect on Silver production. Mexico is the largest global silver producer. How do they mine silver without cheap energy? My understanding is that we’re already seeing gasoline theft and a growing black market. How long before mining companies find the environment too volatile and expensive to risk mining in Mexico? This is very reminiscent of PDVSA (Venezuela’s state oil company) How did that work out?

    U.S. goods and services trade with Mexico totaled an estimated $579.7 billion in 2016. Exports were $262.0 billion; imports were $317.6 billion. The U.S. goods and services trade deficit with Mexico was $55.6 billion in 2016.

    Mexico is currently our 3rd largest goods trading partner with $525.1 billion in total (two way) goods trade during 2016. Goods exports totaled $231.0 billion; goods imports totaled $294.2 billion. The U.S. goods trade deficit with Mexico was $63.2 billion in 2016.

    U.S. total imports of agricultural products from Mexico totaled $23 billion in 2016, our 1st largest supplier of agricultural imports. Leading categories include: fresh vegetables ($5.6 billion), other fresh fruit ($4.9 billion), wine and beer ($3.1 billion), snack foods ($2.0 billion), and processed fruit & vegetables ($1.5 billion).

  2. Really it cannot be denied that Pemex was run very poor and most money went where it was
    very poor allocated. Typical a govt. company with too many ppls on the books. Mexico has still a lot of oil/gas reserves but Pemex need to get their act together. Same as for Egypt now that they found and busy exploiting huge gas reserves offshore.

  3. Steven Leab has been posting similuar articles … the world doesn’t have enough oil, or other natural resources going forward, and the west is going to suffer the greatest due to the mismanagement and lack of planning!! See here:

    • Ah! but you see the west thought they would be taking all their oil and gas from Russia after the collapse in 1990, a collapse which they thought (erroneously) they had instigated. This accounts for the demonisation of Putin, as he has almost single-handedly been responsible for putting Russia back on its feet (plus a bit!) and helps to explain the wars in the ME oil producing countries that were/are an ineffective panic reaction to the realization of what Steven Leab says. They still think they will take Russia which just goes to prove they still haven’t a clue how to solve their problems!

  4. <>

    I find it incredible that a large business like Pemex does not hedge it’s currency risk!

  5. CFO point of view | March 2, 2018 at 12:54 am |

    As I appreciate your work, I can’t comment 2 mistakes you make:
    1. In first lines of this post you wrote that falling Peso to US Dollar is one of the reasons for the loss of this company. It’s the opposite – when you have costs in Peso and you sell in $, then as Peso weakens you get more Pesos for your sales in USD!
    2. I don’t agree with your statements as more technology = more energy used. As it may be generally true in society as a whole. Consider a case that you use your 15 year old machine and it uses 2 gallons of gas per hour. Let’s say your engineer read in home some book and he got brilliant idea that by putting some small device he will decrease usage of oil by 1/3. And consider that to build this device he will use energy (from whole process of constructing each part of this device!) equal to 100 gallons of gas. It means that after 150 hours of work this device will not only pay itself – it will start generating savings in energy used.
    Moreover if CEO of this company will consider this investment not worth developing it will remain only as an idea of that engineer. And generally company’s managements try to make reasonable decisions – which means that while competing on the market, they are constantly decreasing usage of energy. All the time.
    There are some exceptions maybe – as State owned enterprises or companies like shale oil and so on, but in country where I live in Europe we struggle all the time to improve our usage of energy and decrease costs. This is happening on a daily basis and many times it means that we decide to make investments – but only those that we consider beneficial.

    • CFO point of view,

      While I appreciate your reply, I am quite surprised by your statements. I see that you label yourself as a “CFO point of view”, but your understanding of what is really happening with PEMEX’s financials is completely counter to your opinion. You say that the falling Peso is not the problem with PEMEX losing money. You are totally wrong on this one. Not only did PEMEX state this in their press release, but so did several other large News agencies.

      Furthermore, if you READ the article, and looked at the financial tables from PEMEX, you would have also seen a $7.6 billion FOREIGN EXCHANGE LOSS for the quarter. Now, I don’t know how else to interpret that, but I am quite surprised that you see a falling PESO as a positive for the company, whereas PEMEX has stated that it was a huge NEGATIVE.

      As for your second point om the subject of more technology not being less efficient, I have covered it enough and do not want to waste any more time on this subject.



      • CFO point of view | March 3, 2018 at 7:55 am |

        Dear Steve,

        Thanks for answer, but I can’t change my mind – either you get it or not in point no. 2. More technology means in my company less energy used. I understand that after reading my example there is not much you can argue about, but in such case you may simply say that you didn’t thought about it…
        As for no.1 this loss may be and most probably is only “paper loss” (not cash) resulting from change in valuation of derivatives (like forwards) or debt in foreign currency. So company indeed is realising more cash and positive result from operations, but in the same time it needs to revalue their balance sheet positions in relation to P&LA – thats 101 in finance (my profesion). This revaluation concerns also future – it may concern even liabilities that will be realised in 5 years. So currently you show big loss in P&LA statement and in next 4 years you are going to show profits as you receive more Peso for sales in USD.

  6. Egypt shows the way. As one oil exporter after the other will at some point turn to be an net importer, the coming global energy crisis is already baked into the cake. The current status quo is only maintained by (so far) “cheap” credit. Good luck FED with rising rates AND an ever-growing mountain of debt – it will be the death of the North American oil pits… …something is gonna snap before long and it won’t be decades away as some think.

    When reading this I re-though of an old idea that was based on more generalized EROEI concept. The total energy used to produce energy in a energy-producing country would – all assumed being stable – be the total energy consumption of that country. The surplus of energy (total energy produced – total energy consumed) would be the surplus that could be sold to either investors in the country or exported / sold. This could be further refined, of course, but I think I first thought about it this way when reading a Steve-piece on Saudi-Arabia (?) own rising oil consumption vs. what they are able to export.

    Anyway, great piece Steve, and GLTA – we will all need it before long.

  7. Thank you for your insightful analysis mr. St. Angelo !
    But it seems clear to me that a fall of the peso is an advantage to PEMEX and not a problem. The company sells oil in $ and then it pays bills in pesos.

    I wonder what the alt-right press is going to say when Mexico gets into the same troubles Venezuela is suffering today. Mainly because rightwingers have used Venezuela as an example of the failed policies led by the left and now Mexico is going to suffer similar illnesses. And Mexico seems to be a good pupil of all neoliberal doctrines with its attachment to free trade dogmas. In many aspects Mexico is an obedient colony of the USA. Are they going to ignore the mexican woes ?

    • Vituvius,

      For some odd reason, you and the other commenter, CFO point of view, are of the opinion that the falling PESO is a good thing for PEMEX. As I stated in my reply to the CFO point of view, PEMEX stated in their press release that the huge depreciation of the PESO versus the DOLLAR was one of the factors why the company suffered the $18 loss. Also, if you looked at the Financial Tables that I included in the article, you would have seen the $7.6 billion FOREIGN EXCHANGE LOSS.


  8. Sorry but I am going to join the legion of thickos here Steve (please don’t shout at me!)

    If the Mexican peso is going down the toilet, isn’t it better to have their revenues in US dollars (which are relatively stronger than pesos?)

    When they exchange the US dollars back to pesos they will receive more pesos.

    I appreciate the FX loss they suffered last quarter. But would the loss not have been even WORSE if the peso had appreciated ?

    • Ian Seed,

      With the complexities of Foreign Exchanges and flow of funds, it is difficult to understand what is going on. However, when top news agency Reuters publishes the same information that I have seen on several other news agencies, then I would assume the information is correct:

      UPDATE 1-Mexico’s Pemex posts nearly $18 bln 4th-qtr loss as output, refining dip

      MEXICO CITY, Feb 26 (Reuters) – Mexican state-owned oil company Pemex reported a nearly $18 billion fourth-quarter loss on Monday after both crude output and processing slid, though the company said refining levels should rebound as major maintenance plans are completed.

      The company posted a 352.3 billion ($17.9 bln) peso loss for the last quarter of 2017, blaming a weaker peso exchange rate and higher financing costs for its performance, according to a filing with the Mexican stock exchange.

      Pemex lost 151 billion pesos during the fourth quarter due to a weaker peso, the company said, which depreciated 8 percent against the U.S. dollar.

      While most of Pemex’s costs are in pesos, it sells crude oil and buys imported fuels like gasoline in dollars.

      Financial costs were up 35 percent during the quarter, mainly because of larger indebtedness, the company said.

      Now, maybe all the accountants at PEMEX are incompetent or the financial authors at several of the larger news agencies are inept, but if the COST OF SALES shown on the NET INCOME table has skyrocketed during the fourth-quarter, then maybe they might know what they are talking about.

      I don’t mind anyone disagreeing with me and offering an alternative viewpoint. Actually, I enjoy it. However, it seems to be in this case that PEMEX and the financial news industry are reporting a large factor in the $18 billion loss was the depreciation of the PESO. I do not know how else to interpret that.


      • Thanks for the reply Steve. I really appreciate you taking the time.

        I’ve been checking in on your site the past few months ever since I heard your talk with Chris Mortensen. It really blew up my mind. I’ve listened to that discussion five or six times subsequently and I’ve shared the link with several other people.

        When you explained that these huge debts are a symptom of the problem, not the problem itself, things started making sense. The underlying problem is of course falling EROI.

        That is just so obviously true.

        Of course we need energy to grow an economy – that’s the most basic relationship of them all.

        Thanks for shining a light on that.

    • They have a huge debt in dollars so the forex loss is almost guaranteed every time the USDMXN rises.

      • Thanks Paco 🙂

      • I think Paco’s got it.

        MX debt is $95 B, so an 8% devaluation of the Paso would be $7.6 more dollars owned on a dollar-based debt.
        Two points for Paco.

    • Perhaps their domestic sales are in pesos which are then needed to buy foreign production materials.
      Is there anywhere in data giving % of domestic sales vs foreign?

  9. I see this oil exploration company as a leading indicator – CGG – back in 2008 their share price hit 600Euros, and it is now 1.34Euros.That is not a typo, its lost 99.77% of its apparent value.

  10. Maurice Miner | March 2, 2018 at 4:51 pm |

    Yes, at first it sounds counter-intuitive. However, look again at Steve’s third chart above.

    The simple fact that Mexico “switched from being a net exporter to a net importer of crude oil and petroleum products from the United States” sometime in 2015 or possibly 2016.

    The Peso doesn’t do so well in that scenario, particularly with its depreciation against the USD.

  11. Petedivine | March 2, 2018 at 5:06 pm |

    I did a quick google search on what percentage of Pemex revenue went to the Mexican government. I found this article from Forbes written Feb-2016

    “Mexico’s government has depended on oil for up to 35% of its revenue over the past decade, but with lower prices and lower production, that total has fallen closer to 20%, leaving a growing gap in the federal budget, that has been covered by cutting spending in infrastructure projects and government salaries and services.”

    Not sure what happens when 20-35% of Mexican government revenue not only becomes unfunded, but will have to rob Peter to pay paul if they want PEMEX to continue as an ongoing concern.

    We may be farther down the rabbit hole then I thought with regards to Mexico.

  12. with all due respect to author and commenters, I believe that the answer to the question:
    A falling peso is good or bad for PEMEX’s Consolidated Statements of Cash Flow?
    The answer is: it is bad. It results in a negative number whether they choose to show it in foreign exchange losses or else.

    The reason is in graph above: Mexico is a net importer of petroleum crude and products. Some 400 kbd in 2017.
    In 2017, Pemex imported approximately 1 million barrels per day of products (1000 Kbd, 80 % costly gasoline and diesel) which they buy in dollars and sell in pesos. They exported some 0.6 million barrels per day (600 Kbd) of less expensive crude oil they sell in dollars and spend in pesos.
    This means that in 2017 environment, each time peso loses ground to the dollar, Pemex cash flow suffers.
    I hope this helps

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