>Mexican President Andrés Manuel López Obrador, known as AMLO, is enjoying a considerable political gift: The trial of Emilio Lozoya, former chief executive of Petróleos Mexicanos, or Pemex, Mexico’s state-owned oil company, began this week. Lozoya, until recently a fugitive in Spain, stands accused of industrial-scale graft. AMLO is reeling from a disastrous response to the coronavirus and a public increasingly at odds with his stewardship of Mexico’s sinking economy. The theatrics of the hearings play right into AMLO’s rhetoric and could give him a chance to distract the Mexican public from his own administration’s failings.
AMLO won the presidency in 2018 by denouncing public corruption, which he characterized as the greatest malaise plaguing the country. His personal austerity appealed to many Mexicans fed up with the country’s endemic corruption. They exalted in his characterization of public sector workers as “fifís,” a derogatory term aimed at wealthier, privileged Mexicans.
The Lozoya case is the highest-profile anticorruption trial of AMLO’s campaign to root out systemic corruption. Yet the case could expose an even wider web of cronyism and graft, and Lozoya could even become a cooperating witness. Some whispers suggest the tangled web of bribes could lead directly to his old boss, former President Enrique Peña Nieto. This has left AMLO feeling buoyed, just as his once seemingly unsinkable approval ratings have dipped below 50 percent for the first time in his presidency.
Of course, the Mexican president will welcome a renewed focus on his predecessor’s unpopular administration, distracting from media coverage of the country’s second quarter economic nosedive of nearly 20% and of rising narco violence. The image of a president leading the charge against public corruption, and getting results, could be a timely reset for AMLO. His administration began leaking details of the case as soon as it announced Lozoya’s extradition, and AMLO has even hinted at the necessity for a deposition from Peña Nieto, a spectacle he would surely relish.
Already, AMLO has declared the Lozoya trial a watershed moment in the battle against corruption and for the future of Pemex. By itself, however, corruption does not explain the highly troubled state of the company, which AMLO sees as a crown jewel of the Mexican state. With more than $100 billion in debt, Pemex has the dubious honor of being the most indebted state-owned oil company, as well as the most indebted major oil company, in the world. While a positive step forward, the Lozoya case should mask neither the company’s precarious financial position nor the fact that AMLO lacks a remotely credible plan to restore Pemex.
Although Pemex’s troubles started well before the López Obrador administration, AMLO’s plan for reviving the iconic company has made things worse for its bottom line. The company’s unsustainable debt has ballooned under AMLO's watch. It is now 24% more indebted than it was in December 2019, causing credit agencies to cast its bonds in the junk status pile. In 2014, a constitutional overhaul permitted private-sector oil exploration and drilling for the first time in seven decades. The much-needed reform brought the promise of halting 15 years of production decline at Pemex. However, under the misguided notion of resource nationalism, AMLO declared that the “era of privatization is over.” The López Obrador administration effectively reversed this reform and shut the door on partnering with foreign firms that had invested after the overhaul.
Another cornerstone of AMLO’s recovery plan is a major oil refinery in his home state of Tabasco. At an eye-popping $8 billion price tag, few analysts expect the refinery to significantly revitalize Mexico’s domestic production, instead saddling Pemex with more debt. Further, a hamhanded attempt to renegotiate pipeline contracts signed by his predecessor undermined the willingness of the private sector to offer a lifeline to Mexico’s battered oil industry.
Far from being the engine of economic growth AMLO envisioned, therefore, Pemex has quickly become Mexico’s largest public-sector liability. Pemex’s survival depends on its ability to increase its output, yet the tools to ramp up production are not on the table. Consequently, output under AMLO currently sits at about 1.7 million barrels per day (from a peak of 3.4 million bpd in 2004). This is approximately 1 million bpd short of what the company needs to achieve a modicum of fiscal sustainability. It is no wonder that with this outlook, the company has registered seven consecutive trimesters of financial losses.
Pemex’s troubles are even more unfortunate in light of the recent signing of the U.S.-Mexico-Canada free trade agreement, or USMCA. North America’s energy companies already benefit from significant levels of cooperation, but the USMCA presents another opportunity to integrate North American energy supplies and achieve greater energy independence. AMLO’s obstinacy threatens these opportunities.
Resuscitating Pemex requires a decade of concerted reforms and a detailed road map to financial solvency. While Emilio Lozoya’s trial may be a politically useful spectacle for AMLO, there are not enough corruption distractions to conceal Pemex’s failures.
Ryan Berg is a research fellow in Latin America Studies at the American Enterprise Institute based in Washington.