Mexico oil cutback could boomerang on nation's development

Mexico's decision to cut oil production by 25 percent immediately is certain to have a negative impact on the country's ambitious development projects, which depend so heavily upon petroleum exports for funding.

The move results from sharply lowered demand for Mexican oil on the world market. It also comes as five foreign governments and six United States oil firms have refused to pay the $2 a barrel price increase ordered last week by Petroleos Mexicanos (PEMEX), The state oil enterprise.

A similar refusal by a French company to pay the increase last week resulted in a Mexican government decision to suspend a variety of French commercial contracts, with the implied threat that this might happen to other countries as well. But so far there has been no such overt action and there is now some indication that Mexico may soften its stand against the French.

The production cutback, ordered July 7, drops daily output by 700,000 barrels to 2 million barrels, sharply reversing the steadily increasing production trend of the past year.

For the government of President Jose Lopez Portillo, the cutback decision could prove politically embarrassing. A potentially divisive debate over petroleum policy has been underway during recent weeks.

Reports of extremely angry discussions between Cabinet members indicate that some government officials go so far as to argue that Mexico ought to limit its production to its own basic needs, keeping the rest of Mexico's prodigious oil reserves in the ground for future domestic use.

Such a course is unlikely, but sluggish world demand for Mexican oil means that Mexico simply does not have enough markets for current production.

Mr. Lopez Portillo is understood to have personally resisted the cutback, largely out of concern for its impact on Mexican development needs which are proving increasingly costly. Even without the cutback, Mexico was expected to need more than $3 billion, perhaps as much as $5 billion, in new foreign credits during the rest of the year to pay for the inflation-wracked development projects. Such borrowing is a heavy addition to an already high foreign debt structure.

But the Lopez Portillo government apparently reasons that there was no alternative to the oil production cutback. The buildup of unsold oil has exceeded all available storage facilities. Empty oil tankers in the harbors of Coatzacoalcos and Tampico have been pressed into service to store petroleum.

The cutback order, nevertheless, is clearly controversial. It comes close on the heels of Mexico's decision to raise its oil prices by an average of $2 a barrel in order to minimize the impact of an earlier $4 a barrel price slash that could have cost Mexico $1.2 billion in export earnings this year.

Groping its way through the world oil glut, the Lopez Portillo government is having a hard time deciding just what its oil policy should be. Many foreign oil companies and governments have a sense of uneasiness about Mexico as an oil source. The recent resignation of Jorge Diaz Serrano, longtime executive director of PEMEX, worries many foreign oil executives who were impressed with his steady hand at the helm of the Mexican oil industry.

They are less sure about his replacement, Julio Rodolfo Moctezume Cid, and they are concerned that Lopez Portillo himself is flounderi ng in an effort to develop a coherent oil policy for Mexico.