Mexico does turnabout, wants oil prices to fall

Inflation worries officials as country concentrates more on manufacturing


VERACRUZ, Mexico -- 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, which is 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 Lopez, a Mexican who is an analyst at Petroleum Finance Corp., a consulting firm in Washington.

The turnabout on prices 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 today.

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

At an oil industry convention yesterday in Veracruz on the Gulf Coast, Tellez 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," Tellez said at a news conference. "We're not a petroleum country anymore."

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, oil's contribution has withered to 1.7 percent.

So although high world petroleum prices mean 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 would far outweigh the short-term profits from $30-a-barrel oil.

In 1997, when the Asian economic crisis cut world demand for energy, prices for Mexico's extra-heavy oil plunged to below $7 a barrel, causing a crisis in Mexico.

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

Early last year, oil prices began to rise sharply, but only since December have dangers become apparent.

"These prices are too high," Tellez said yesterday. He said a consensus has formed among the ministers of OPEC and Norway that production should rise, allowing prices to drop.

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