oil and politics south of the border

SeekingAlpha | This graph tracks Mexico's national deficit in billions of Mexican pesos. The figures are released monthly; the above graph shows the cumulative trailing 12-month total deficit.

It's not hard to see that since early 2008 Mexico's deficit has grown to unsustainable levels. There are two major reasons for this escalation: a severe contraction in the Mexican economy and plummeting oil revenues.

As to the first point, Mexico's economy declined at an annualized rate of more than 10 percent in the second quarter and at a rate of more than 6 percent in the quarter ended September 30. Analysts estimate that Mexico's economy shrank 7 percent in 2009.

And the nation's recovery doesn't look robust: Analysts expect the Mexican economy to grow 2.95 percent in 2010 and just 3.25 percent in 2011. The health of Mexico's economy depends heavily on what transpires in the US; unlike Brazil, China and India, there is little chance of the Mexican economy decoupling from the fortunes of its northern neighbor.

The second problem is just as insidious and has been building for some time. Mexico's crude production topped out at 3.4 million barrels per day in 2004, declined to 3 million barrels per day in 2007 and 2.8 million barrels per day in 2008.

According to PEMEX's estimates, production will total just 2.5 million barrels per day in 2010, and exports will be in the neighborhood of 1.1 million barrels per day--down over 40 percent from 2004.

This forecast has major implications for Mexico's fiscal health. State-owned PEMEX is the sole producer of crude oil and natural gas in Mexico; the company’s oil-related export revenues account for roughly 40 percent of Mexico's budget.