Mexican oil boom
Encyclopedia
The Mexican Oil Boom was an oil boom
from 1977 to 1981 which eventually led to a disastrous crash that lasted for most the 1980s, driving the economy to a payment default and a big deficit correction as oil prices fell.
performed very consistently, averanging 6% GDP
growth each year and 3% inflation
rate, allowing the country to sustain a $12.50 pesos per US dollar
for 22 years (1954-1976). This period, called the "Mexican Economic Miracle" and "Stabilizing Development", consisted in a ISI Model (import substitution). By late 1970s the economy faced certain limitations in the economic model, at the same time the United States
were troubled with a rising trade deficit
, sparking an international financial period of uncertainty.
Mexico
opted out to put more public money and investment to sustain fast growth
. This was fuelling inflation as government spending was fully financed with new printed money.
A devaluation in 1976 caused some panic until Petróleos Mexicanos (PEMEX)
discovered the Cantarell Field
, boosting perspectives to exploit the soaring oil prices and the government decided to invest and change the economic model.
The expansion was mostly financed by loans and foreign money, as cheap credits from private banks and a blind faith from financiers allowed big sums of money to be invested easily, at the same time a free spending public sector began to invest in nearly anything within the nation.
This money was trickling down to the broader economy and the private sector, the most benefited sectors were Construction, Mining and Transport, whose companies depending on private consumer also where in the free spending party, as result consumer goods imports soared 4.4 times* in 1981 from their 1977 level.
in 1982 to stop inflation in the United States, those highly indebted nations like Mexico, which invested heavily to develop its field, were in crisis. Interest
rates zoomed up dramatically at the same time oil demand and prices eased the result, was a gap of nearly 9% of the GDP in the national budget
of 1982, turning Mexico in to default
on their interest payments and finally signing up the commitments of the IMF
, those financial commitments the government rejected back in 1976 when the fields were discovered.
The effects of the budget cuts impacted the economy across the board, as the sale and privatization
of the assets in the economy and job cuts pushed thousands of people out of work, government payroll shrank, and the ongoing restructuring of the private and public economy to face the new realities derived a series of reforms, aiming a growth dependent on trade, private investment and a bulk of sectors, this was called to cut the importance of the oil for the macroeconomy
, and its dominance on the export
earnings. The economy growth during the 1980s was nil, and is often called the "lost decade"
Oil boom
An oil boom is a boom in the oil producing sector of an economy. Generally, this short period initially brings economical benefits, in term of increased GDP growth, but might later lead to a resource curse.-Consequences:...
from 1977 to 1981 which eventually led to a disastrous crash that lasted for most the 1980s, driving the economy to a payment default and a big deficit correction as oil prices fell.
Pre Boom Period
Since 1954 and until 1971 the Mexican economyEconomy of Mexico
The economy of Mexico is the 13th largest in the world in nominal terms and the 11th by purchasing power parity, according to the World Bank.Since the 1994 crisis, administrations have improved the country's macroeconomic fundamentals...
performed very consistently, averanging 6% GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
growth each year and 3% inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
rate, allowing the country to sustain a $12.50 pesos per US dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
for 22 years (1954-1976). This period, called the "Mexican Economic Miracle" and "Stabilizing Development", consisted in a ISI Model (import substitution). By late 1970s the economy faced certain limitations in the economic model, at the same time the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
were troubled with a rising trade deficit
Balance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
, sparking an international financial period of uncertainty.
Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
opted out to put more public money and investment to sustain fast growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
. This was fuelling inflation as government spending was fully financed with new printed money.
A devaluation in 1976 caused some panic until Petróleos Mexicanos (PEMEX)
Pemex
Petróleos Mexicanos or Pemex is a Mexican state-owned petroleum company. As of 2010, with a total asset worth of $415.75 billion, it is the second non-publicly listed largest company in the world by total market value, and Latin America's second largest enterprise by annual revenue as of 2009...
discovered the Cantarell Field
Cantarell Field
Cantarell Field or Cantarell Complex is an aging supergiant oil field in Mexico. It was discovered in 1976 by a fisherman, Rudesindo Cantarell. It was placed on nitrogen injection in 2000, and production peaked at in 2003. In terms of cumulative production to date, it is by far the largest oil...
, boosting perspectives to exploit the soaring oil prices and the government decided to invest and change the economic model.
The Oil Boom Era
Between 1977 and 1981 PEMEX oil production grew almost twofold from 1.086 million bbd to 2.313 million bbd*, and net exports 5-fold from 0.197 million bbd to 1.154 million bbd*, this led to a 4 year 8.4% average growth in the GDP, and even as inflation crept up higher from a high base above 20% yearly, the massive job creation and rapid wage pace kept the workers mood calm.The expansion was mostly financed by loans and foreign money, as cheap credits from private banks and a blind faith from financiers allowed big sums of money to be invested easily, at the same time a free spending public sector began to invest in nearly anything within the nation.
This money was trickling down to the broader economy and the private sector, the most benefited sectors were Construction, Mining and Transport, whose companies depending on private consumer also where in the free spending party, as result consumer goods imports soared 4.4 times* in 1981 from their 1977 level.
Oil Prices Drops and its consequences
When the world economy was hard hit by the interest rates hike from Paul VolckerPaul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
in 1982 to stop inflation in the United States, those highly indebted nations like Mexico, which invested heavily to develop its field, were in crisis. Interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
rates zoomed up dramatically at the same time oil demand and prices eased the result, was a gap of nearly 9% of the GDP in the national budget
Government spending
Government spending includes all government consumption, investment but excludes transfer payments made by a state. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final...
of 1982, turning Mexico in to default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
on their interest payments and finally signing up the commitments of the IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
, those financial commitments the government rejected back in 1976 when the fields were discovered.
The effects of the budget cuts impacted the economy across the board, as the sale and privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
of the assets in the economy and job cuts pushed thousands of people out of work, government payroll shrank, and the ongoing restructuring of the private and public economy to face the new realities derived a series of reforms, aiming a growth dependent on trade, private investment and a bulk of sectors, this was called to cut the importance of the oil for the macroeconomy
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
, and its dominance on the export
Export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
earnings. The economy growth during the 1980s was nil, and is often called the "lost decade"