Mexico will adopt the aggressive price-cutting strategies of other oil producers to recover 250,000 barrels a day in sales to the United States, Finance Minister Jesus Silva Herzog said yesterday.
A Mexican move to regain lost U.S. sales is likely to result in an escalation of the petroleum price war that has raged since last winter, when Saudi Arabia sharply increased its oil production.
Silva Herzog said in an interview with reporters and editors of The Washington Post that Mexico must recover its lost U.S. sales because it needs the revenue to pay the interest on its massive, $97 billion foreign debt. Most of the money is owed to commercial banks.
He said the sharp decline in prices will cause Mexico severe problems in 1986 and he does not foresee much improvement in 1987. He said Mexico will have to tighten its belt in 1986 for the fifth consecutive year -- a situation he conceded could lead to increased social and political unrest.
Since November, oil prices have plunged dramatically and Saudi Arabian exports to the United States have increased, largely at the expense of Mexico, for years this nation's largest foreign oil supplier.
Oil experts say that Saudi exports have risen in large part because they have developed new sales practices that tie the price of a barrel of oil to the price oil refiners get for their products. These so-called netback sales protect refiners in case the price of heating oil or gasoline should decline between the time they buy the crude oil and sell the refined products.
Mexican sources said privately that they expect oil prices to decline further as Mexico makes a bid to get back to its traditional level of oil exports to the United States -- which averaged 815,000 barrels a day in 1985.
According to Energy Department statistics, Saudi Arabian exports to the United States rose to an average of 664,000 barrels a day in January, about four times the kingdom's average exports of 167,000 barrels a day in 1985.
Oil prices have plunged from about $27 a barrel in December to less than $14 today, triggering a major financial crisis in Mexico, which relies on oil for about 70 percent of its foreign earnings and 45 percent of its domestic taxes.
As a result of the decline in prices alone, Mexico will be short $6 billion to $8 billion in export earnings that it had counted on when planning for 1986. Unless Mexico is able to regain its U.S. markets, it will lose another $1 billion or more.
Silva Herzog said Mexico has lost oil sales because the debtor nation has played by traditional rules while other nations have not. Under traditional oil sales practices, purchasers pay for crude oil when it is loaded on a ship.
But in the current volatile petroleum markets, refiners run the risk of losing money because the price of their products might fall dramatically before the crude oil they buy can be refined.
To eliminate that risk, Saudi Arabia and other oil-exporting countries are entering into netback sales. In a netback sale, the refiner does not pay for the crude oil until after the refined product is sold. The price the oil-producing country receives for its crude oil is based upon the price the refiner received for finished products such as gasoline.
Although Silva Herzog did not say Mexico would use netback pricing, he said the nation "will move in such a way as to recover our markets." He said Mexico would play by the new "rules of the game."
The Mexican finance minister -- who touched off the Latin American debt crisis in 1982 when he said that Mexico could not pay its bills without help -- said that the drop in oil prices will cause fresh pain in Mexico, which is the developing world's second-biggest debtor country.
He said that, although Mexico will find it hard to pay its foreign bills, the plunge in oil prices will be even harder on the domestic economy.
To replace the $6 billion to $8 billion in lost foreign sales, Mexico will cut imports by $2 billion and reduce a planned increase in foreign reserves by $1 billion, he said. Because worldwide interest rates will be lower than projected when Mexico drew up its financial plan late last year, Silva Herzog said Mexico will pay creditors about $1.5 billion less than anticipated.
He said Mexico will ask bank lenders to reduce the profit margin on their loans by enough to save the country another $500 million in interest payments. The remaining shortfall in foreign earnings will be made up through concessions from official government lenders and through new loans from its commercial bank lenders.
Domestically, Silva Herzog said the country will have to make further cuts in its already strained budget -- although the plunge in oil revenues is likely to double the domestic budget deficit.
Over the long run, the economy must decrease its reliance on oil, he said. The country will seek increased foreign investment, open up its once heavily protected markets and prod Mexican producers into selling more of their products abroad.
He said Mexico also will seek to convince some of its lenders to convert their loans into equity or stock investments in Mexican companies. Mexico will try to sell a large number of publicly owned companies that are a drag on the economy and the federal budget.