Oil conundrum

OECD Economic Survey of Mexico 2009
OECD Observer

"This makes you my competitor", said oil pioneer Daniel Plainview on learning that his son wanted to quit the wells in California to drill his own in Mexico, in the 2007 movie, There will be Blood. And to be sure, Mexico did become a competitor, producing oil in the early 1900s and becoming the second largest producer in the Americas after the US by the 1990s.

However, with oil and gas exports being over 20% of Mexico's GDP in 2007, managing the impact of volatile oil revenue has been a challenge. According to the latest OECD economic survey of Mexico, because oil price fluctuations tend to be synchronized with the world economic cycle, the budget has a tendency to accentuate the swings, with more spending in good times and spending cuts during downturns. Moreover, Mexico's balanced-budget rule requires revenues to be matched by swings in spending, causing public finances to rise and fall like a nodding donkey.

The trick for policy is to smooth the injection of oil revenue into the economy over the business cycle and avoid abrupt changes in public spending.

Mexico has already established several oil-stabilisation funds for this purpose, but accumulated savings were capped at relatively low levels. A recent decision to raise the cap goes in the right direction, though Mexico should consider eliminating it altogether, the authors say. They warn that declining oil production will put pressure on public spending and suggest action, such as expanding the tax base since some 30-40% of budget revenues depend on oil, while non-oil taxes are only 10% of GDP.

Also, an energy excise tax should be introduced and some energy subsidies scrapped, because they benefit the well-off, encourage CO2 emissions and reduce interest in alternative energy sources.

Income support schemes can help low-income groups with their energy needs as can targeted subsidies. With the right reforms, Mexican oil would still be a competitor, but other areas of the economy would also benefit, and that would be good news for public finances.

ISBN 978-92-64-05441-7

©OECD Observer No 274, October 2009




Economic data

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • In the run-up to the annual OECD Eurasia Week in Almaty, Kazakhstan 23-25 October, The Astana Times has run an article by OECD Secretary-General Angel Gurría. He urges Eurasia countries to stay the course on openness and international integration, which has brought prosperity but also disillusionment and inequality. He argues that economic policy can be shaped for greater inclusiveness.The OECD is working with this key region to make trade easier and diversify economic activity, and Mr Gurría urges Eurasia to focus on human capital and innovation to enhance productivity and people’s well-being. Read more.
  • When someone asks me to describe an ideal girl, in my head, she is a person who is physically and mentally independent, brave to speak her mind, treated with respect just like she treats others, and inspiring to herself and others. But I know that the reality is still so much different. By Alda, 18, on International Day of the Girl. Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Read some of the insightful remarks made at OECD Forum 2017, held on 6-7 June. OECD Forum kick-started events with a focus on inclusive growth, digitalisation, and trust, under the overall theme of Bridging Divides.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • How do the largest community of British expats living in Spain feel about Brexit? Britons living in Orihuela Costa, Alicante give their views.
  • Brexit is taking up Europe's energy and focus, according to OECD Secretary-General Angel Gurría. Watch video.
  • OECD Chief Economist Catherine Mann and former Bank of England Governor Mervyn King discuss the economic merits of a US border adjustment tax and the outlook for US economic growth.
  • Africa's cities at the forefront of progress: Africa is urbanising at a historically rapid pace coupled with an unprecedented demographic boom. By 2050, about 56% of Africans are expected to live in cities. This poses major policy challenges, but make no mistake: Africa’s cities and towns are engines of progress that, if harnessed correctly, can fuel the entire continent’s sustainable development.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa. blogs.worldbank.org
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2017