The Mexican Paradox; High oil prices should be great news for the country. So why are officials fretting about its economy?

Byline: Scott Johnson

Spirits have been high and coffers full in commodity-rich developing nations from West Africa to East Asia recently, thanks to record-high oil prices. Countries like Nigeria, Venezuela, East Timor and, of course, the Middle Eastern oil states are seeing record inflows as prices continue to spiral upward. Net exporter Mexico is growing fat, too--oil has yielded an extra $12 billion in revenues so far this year. But far from being gleeful about the boom, officials there are fretting about the impact of high oil prices on the country.

The paradox is a result of Mexico's unique place in the global economy. Unlike many oil states, Mexico has a relatively diversified economy--only 10 percent of its exports come from oil. The problem is that the other 90 percent, including things like electronics, textiles and medical supplies, go almost wholly to the United States. And there, high oil prices are beginning to have a dampening effect on the economy. What's more, non-oil exports are facing increasing competition from China, which has siphoned off thousands of Mexican manufacturing jobs. And a sclerotic state-controlled oil sector hasn't invested enough in homegrown refineries, meaning that Mexico must buy refined petroleum from the United States, at the going prices. The result, says Alejandro Werner, a senior adviser at the Finance Ministry, is a situation in which "the Mexican economy may slow down, even as oil prices continue to go up."

How much it slows will depend on just how far the U.S. economy falls. According to Jonathan Heath, chief Mexico economist for HSBC, for every $5 increase in the price of oil, U.S. growth is cut 0.4 percent. Already there are signs that nosebleed oil prices are dampening American consumer enthusiasm. Two weeks ago Federal Reserve chairman Alan Greenspan said that high oil prices have cut into U.S. GDP growth this year, and warned of worse to come. If that happens, the border area Mexico shares with the United States, where hundreds of maquiladoras churn out goods for the U.S. market, would suffer. That's a concern; after all, it was the maquiladora sector that helped wean Mexico off its historical dependence on oil.

This poses a problem precisely because Mexico no longer relies as much on oil as other big net exporters in the region--only 35 percent of total government revenues come from Pemex, the state-owned oil company, compared with 80 percent in ...