Courtesy of fernandomontesdeoca.com

Since its creation in 1938, Pemex has been a symbol of national sovereignty and a source of pride for the country. It is generally accepted in Mexico that the country’s oil belongs to all Mexicans, but is oil wealth being equally distributed?

A study published this month by the Oxford Institute for Energy Studies in the UK found that the country’s wealthiest 10% were indirectly benefiting more from oil revenues because the taxes collected from Pemex alleviate the government’s pressure to raise income from those who earn the most.

The issue of eliminating gas subsidies has been a recurring one in the media and in the political debate about the need for new structural reforms, which has taken place in the last weeks as the Mexican presidential race heats up. Proponents argue that the subsidies only benefit the upper classes because they are the ones who can afford to buy a car, but what some of these discussions seem to lack is a deeper understanding of the role Mexico’s tax system plays in this matter. The study states that the unequal distribution of oil wealth is due to the tax breaks high earners in Mexico receive, and calls for fiscal reforms to deal with the problem.

Pemex has traditionally funded an extremely large portion of the government’s budget. In fact, the federal government collects around 60% of Pemex revenues in taxes, which accounted for US$63.58 billion last year, while in Brazil for example, the government collects only around 33% of Petrobras’ total revenues. In essence, Pemex revenues fund a major portion of government programmes. However, by granting preferential tax treatment on the wealthy and taxing Pemex heavily to make up for the lost income, the government is draining Pemex of so much capital that the NOC could use to increase its investment capabilities.

With the money Pemex pays in taxes, the company could invest in the much-needed development of new fields or in building refinery infrastructure, which could in turn be used to supply domestic energy demand. There are also major potential gas reserves waiting to be developed when Pemex’s budget permits. Meanwhile, Mexico’s tax expenditures account for 5.15% of the country’s GDP, according to a Fundación Ethos estimate.The unequal distribution of oil wealth also affects Mexico’s oil producing states. Last year, legislators from the State of Campeche submitted a bill to modify the percentage of oil revenues that producing states in Mexico receive from 0.6 to 3%.

Another consequence of this situation is that the pump price of gasoline has been increasing in order to make up revenue because of the existing narrow tax base. In an effort to broaden this tax base, some legislators have tried to remove the 15% sales tax exemption that currently applies to food and medicine, which may be one of the few tax expenditures that actually benefit Mexico’s poorer citizens.

For all these reasons, it is essential that further attempts at energy reform are also accompanied by fiscal reform. There has to be a better balance between the country’s revenue base and its distribution of spending. Pemex needs to be provided with the opportunity of becoming a profitable company, and while the company still remains in the hands of the state, oil wealth should also benefit the general population.

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