Pemex: Oil price and financial management in the context of elevated fiscal burden

Tacuba, Angélica Article Pemex: Oil price and financial management in the context of elevated fiscal burden Journal of Economics, Finance and Administrative Science Provided in Cooperation with: Universidad ESAN, Lima Suggested Citation: Tacuba, Angélica (2022) : Pemex: Oil price and financial management in the context of elevated fiscal burden, Journal of Economics, Finance and Administrative Science, ISSN 2218-0648, Emerald Publishing Limited, Bingley, Vol. 27, Iss. 53, pp. 175-194, https://doi.org/10.1108/JEFAS-06-2021-0094 This Version is available at: https://hdl.handle.net/10419/289652 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Pemex: oil price and financial management in the context of elevated fiscal burden Ang elica Tacuba Instituto de Investigaciones Econ omicas (IIEc), Universidad Nacional Aut onoma de M exico, Mexico City, Mexico Abstract Purpose –The article analyzes how oil price fluctuations are reflected in the management of Petr oleos Mexicanos (Pemex) based on its balance sheet (BS) and particularly how oil price fluctuations affect Pemex’s corporate income. Design/methodology/approach –The author uses a vector auto-regressive (VAR) model with seven variables for the period 1977–2019. The first variable is the oil price and the others belong to Pemex’s BS: total income, sales revenue, operating costs, investment, payment of taxes, duties and contributions (TDC) and the payment of interest on debt. Findings –The results show that in an environment of elevated fiscal burden that is of an excessive payment of tax by Pemex to the state, the price increases positively affected the income obtained from sales, but that surplus is used primarily to finance the fiscal expenses coming from the TDC, which is associated with the production and commercialization of hydrocarbons; physicaland financial investment is disconnected from the evolution of price. Under a fiscal schemethat extracts, on average, 98.46% of Pemex’s income, investment is not a priority. Practical implications –The findings of the research have important implications for Mexico’s energy policy because of affecting the long-term financial and productive sustainability of Pemex. Originality/value –First, the study contributes to the literature on oil prices in Mexico by analyzing Pemex’s fiscal burden from a corporate finance perspective, an area in which there are few rigorous studies. Second, the study contributes by providing quantitative support for the relationship between oil prices and BS variables through the VAR model. Keywords Oil price, Pemex, Oil tax, VAR model, Balance sheet Paper type Research paper Oil price fluctuations in Pemex 175 © Ang elica Tacuba. Published in Journal of Economics, Finance and Administrative Science. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence maybe seen at http://creativecommons.org/licences/by/4.0/ legalcode The author appreciates the Postdoctoral Fellowship program of Universidad Nacional Aut onoma de M exico (UNAM) for its support for the project “An alisis de la carga fiscal de Pemex desde la perspectiva de las finanzas corporativas”(Analysis of Pemex fiscal burden from the perspective of corporate finances) from which this article is derived. The research is being carried out at Instituto de Investigaciones Econ omicas (IIEc)-UNAM under the mentorship of Marcela Astudillo Moya, PhD, Primary Investigator of Unidad de Estudios Hacendarios y del Sector P ublico (Fiscal and Public Sector Studies Unit) of IIEc-UNAM. This acknowledgement is also extensive to Luis Augusto Ch avez Maza, PhD of Benem erita Universidad Aut onoma de Puebla (BUAP) for his valuable contributions and comments to the text. The author is also very grateful to Nestor U. Salcedo, PhD, Editor-in-Chief of the Journal of Economic Finance and Administrative Science (JEFAS) and to the reviewers for their patience and careful review of the article. The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/2077-1886.htm Received 10 June 2021 Revised 14 August 2021 Accepted 6 September 2021 Journal of Economics, Finance and Administrative Science Vol. 27 No. 53, 2022 pp. 175-194 Emerald Publishing Limited e-ISSN: 2218-0648 p-ISSN: 2077-1886 DOI 10.1108/JEFAS-06-2021-0094 1. Introduction The influence of oil price in oil endowed economies, also called “petro-states”, has been analyzed from different perspectives (Priest, 2012;Alekperov, 2015;Bouoiyour et al., 2017; S anchez, 2016). The effects of price volatility depend on the social, economic and geopolitical conditions of the country or region. In the case of Mexico, the economy is marked by the “paradox of abundance”or the “resource curse”(S anchez, 2016); oil revenues contribute between 25 and 30% of public revenues (CEFP, 2019), making it, highly dependent on them (Anderson and Park, 2016;Huizar, 2015;Sierra and M endez, 2017). Mexico is among the top 20 crude oil-and-condensate-producing and -exporting countries (EIA, 2020). Compared to other oil companies, Pemex is cost-competitive and profitable (Pemex, 2020a). However, the link between oil and public finances is an opportunity cost at a corporate level. The bonanzas from price increases go mostly to finance the federal budget through TDC, which, during 1977–2019, represented, on average, 98.5% of Pemex’s profits (Pemex, 2019a,b;SIE, 2019). At a corporate level, the best way to look at the price effect is through the BS (Cornejo et al., 2012;Morales et al., 2013). On a financial level, the situation of Pemex is defined by two variables, which play a determining role in the cash flow achieved annually: the oil price and the payment of TDC. The payment of TDC is an expense recorded in the BS and an accounting overview of inflows and outflows that reflects the balance of losses or profits of the firm at the end of the year (Pemex, 2019a). Conversely, the price is an external element to Pemex which is regulated by the international market, and in Mexico, that is taken as a reference to prepare the federal budget due to its influence on the public income and the investment decisions (Rodr ıguez and L opez, 2019;Reed et al., 2019). In BS, the annual balance is determined by making a sequential subtraction of Pemex’s total income, which, in turn, is determined by the oil price. The objective of this study is to understand how oil price expansions are reflected in Pemex BS and how they affect its corporate income and investment. For this purpose, six variables are used as follows: (1) total income; (2) sales revenue; (3) operating cost; (4) investment; (5) payment of TDC (6) payment of interest on debt. Total income includes sales of goods and services (internal and external); operating cost, salaries, rents and purchase of supplies; investment, i.e. the use of capital in various activities that yield benefits; TDC, i.e. the payment of tax obligations to the state and interest, i.e. the cost of indebtedness (Pemex, 2019a). This information is incorporated into a VAR model, which has been used in different research on oil prices (Cologni and Manera, 2008;Muhammad et al., 2018;Mirmirani and Cheng Li, 2004;Ismail et al., 2021;Kamaljit and Vashishtha, 2020). Oil in Mexico is managed by a company that has its own accounting records where it reflects revenues and expenses that are equally affected by price. However, Pemex embodies two contradictory objectives within the national economy. On the one hand, it serves as a financial ark for the public treasury, which obtains a third of its financing from oil revenues; on the other hand, it needs resources to strengthen itself corporately (Pemex, 2019b). Over time, Pemex management adjusts to the two scenarios which cannot be linearly related, as it would be proposed by a deterministic regression model that omits mutual adjustment dynamics of variables. Consequently, this research uses a VAR model because it assumes endogenous dependence of variables, i.e. the price and BS variables are mutually determined and are not the result of rational processes (Sims, 1982;Rodr ıguez, 2011). It should be noted that the results support this endogenous dependence between variables; however, there is a strong bias in favor of using Pemex financial management as an instrument of tax collection over the productive strengthening of the company. The contribution of the paper, in this sense, is an analysis of a corporate and accounting vision of Pemex. The results give solid support to the recommendation of reducing the tax burden and an impulse to new research with a micro-economic or financial focus, focusing on an in-depth proposal of a real plan for recovery and strengthening of Pemex, as opposed to the alternative of leaving it in the role of JEFAS 27,53 176 a supplier of public funds, exclusively (S anchez, 2016;Hern andez and Bonilla, 2020). Our first hypothesis is that Pemex responds to the state tax collection objectives and, at the same time, has investment needs; these two elements compete at a financial level, affecting the use of available resources. The second is that the oil price has a positive impact on Pemex’s total income, but all the potential effect on investment is absorbed by TDC. The rest of this paper is structured as follows. Section 2 reviews the most relevant literature on oil prices and literature focused on Mexico. Section 3 presents descriptive statistics on oil price, oil revenues and oil production, as well as a financial description of the variables and BS balance. Section 4 describes the method. In Section 5, the paper exhibits the results while Section 6 discusses them, including practical implications of the research. Finally, Section 7 presents the conclusion. 2. Literature review Regarding oil price, the same variation is perceived differently by households, politicians, financial markets and economists (Baumeister and Kilian, 2016), depending on the conditions of each country, its position (oil exporter or importer), macro-economic policy and its level of development (Derbali et al.,2019). This has been corroborated by Muhammad et al. (2018),for BRICS economies with a time-varying structural vector auto-regressive (TV-SVAR) model, which simulates the transmission dynamics of the effects stemming from random shocks and by Cologni and Manera (2008) for G-7 countries with a structural-cointegrated VAR model. In general, global energy demand reshapes oil trade (Priest, 2012), influencing the productive dynamics of countries (Shen et al.,2018;Abboud and Betz, 2021) and the best incentive for oil investment, in the face of price uncertainty, is non-distortionary taxes (Blake and Roberts, 2006). Unlike companies that demand oil-derived inputs and experience a rise in costs, price expansions benefit those that produce oil, since they generate a higher-cash flow than expected. In this sense, the studies of Iqbal and Shetty (2018) are important, which address the impact of oil prices on capital expenditure of a group of oil companies, applying a VAR model, impulse-response function (IRF) and augmented-Dickey–Fuller test; they find that price effect depends on the sector in which they are located (exploration and extraction and refining) and size. ElFayoumi (2018) performs a similar analysis for USA companies in the manufacturing, commercial and mining sector, using a financial approach and a VAR model. His results show that price variations do affect company profits And that of Wahhed et al. (2018), who estimate the effect of price on the stocks of companies in different sectors in Pakistan, finding that an increase gives positive signals to stock markets, boosting their performance. VAR models were born as a solution to classical econometric modeling based on the work of Sims (1982). Sims strongly criticized the classical macro-econometric models, since they do not consider many restrictions of economic theory that would cast doubt on the veracity of the results obtained (Rodr ıguez, 2011, pp. 86–87). In the case of Mexico, oil is usually examined from a sectoral perspective and particularly from its contribution to public revenues (Baz an and Gonz alez, 2011;Beshears, 2013;Fuentes and C ardenas, 2010;Mart ınez, 2004;S anchez, 2016;Silva et al., 2021;Huizar, 2015). Pemex is crucial for the Mexican state. Well-documented economic and market-based reasons (  Alvarez, 2014;L opez and Nava, 2018;Salazar and Venegas, 2018), among other reasons, highlight the strategic value of oil and the possibility that Mexico can play its oil card to enhance its development. Pemex is a firm that, despite the policy of fiscal asphyxiation which has characterized it, has survived and generates profit. If the fiscal burden, the cost of its debt and other liabilities had been administered in the past within a framework balancing the national and business priorities, they could have been covered adequately or with minimal damage to the corporate finances, taking advantage of the periods of high prices that also led to higher income (Rodr ıguez and L opez, 2019;S anchez, 2016). Any strategy to revitalize and Oil price fluctuations in Pemex 177 stimulate oil activity requires considerable resources and high prices as incentives for investment (Baz an and Gonz alez, 2011). The current government has undertaken a rescue plan for Pemex, which is a task of maximum complexity due to financial fragility caused by tax burden, excessive indebtedness (which exceeds US$100bn) (Fitch Ratings, 2020) and a drop in production (Hern andez and Bonilla, 2020). Most notably, Pemex is once again playing an important role in national politics and is expected to progressively improve its presentation card in the global environment (Pemex, 2019b;  Alvarez, 2014;Dur an-Encalada and Paucar-C aceres, 2012;Cabrera and D ıaz, 2021). The originality of the research consists of examining the impact of oil prices at the company level using Pemex BS variables, which is something that in the case of Mexico has not been proposed in the literature. The benefit from price increases is diluted by subtracting TDC payment, which is the highest compared to the rest of the BS expenditures. The VAR model captures this situation, giving quantitative support to the analysis and demonstrating empirically that Pemex management, in the face of oil price variations, privileges payment of TDC over investment. 2.1 Pemex financial statement, 1977–2019 This section presents descriptive information on the trajectory of oil prices, public oil revenues and oil production during 1977–2019. Likewise, BS variables are used in the VAR model; their description and position in each of the formulas and the financial margin when subtracting each outlay. In general, the analyzed series shows a strong trend component. As shown in Figure 1, the oil price determines the magnitude of Mexico’s oil revenues, which is a country that is trappedinthe“paradox of abundance”(Huizar, 2015;S anchez, 2016;Sierra and M endez, 2017). Oil contributes one-third of public revenues and is a volatile variable (SIE, 2019). Although production had the possibility of being strengthened by price increases, it fell progressively for 15 years (2004–2019) (Figure 2). Funds were not allocated for the development of new oil fields or for the improvement of crude oil processing in refineries (Pemex, 2019b;Silva et al., 2021). Pemex’s investment was not favored by price dynamics and private capital inflow after the 2013 reform, which promised to be the solution to the needs of capital, was not as expected (Menchar, 2015). The outcome was that production went from 3,371 million barrels a day (mbd) in 2003 –the highest amount –to 1,701 mbd in 2019. Source(s): Own elaboration based on SIE (2019) and CEFP (2019) 0.00 20.00 40.00 60.00 80.00 100.00 120.00 0 100,000 200,000 300,000 400,000 500,000 600,000 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US$ per barrel Millions of US$ Public oil income International oil price Figure 1. Public oil income and oil price, 1977–2019 JEFAS 27,53 178 In terms of income, production capacity and brand equity, Pemex is the most important company of Mexico and one of the largest in Latin America, a region where it ranks number one in phosphate production. It is one of five companies with the largest logistics infrastructure in the world (Pemex, 2020a,b). Considering profit and loss statements, Pemex’s earnings before interest, taxes, depreciation and amortization (EBITDA) leaves it at a margin of 33% over net earnings, exceeding the ones generated by similar companies in other industries and by larger oil production companies. On the other hand, if it is appraised using the corporate indicators of the financial balance, as shown in Table 1, the average profit margin from 1977 to 2019 before payment of TDC (BBTDC) is 58.7% (formula 2) and drops to 4.5% after deducting the amount of the payment of TDC (formula 3). After deducting interests, it drops further to 2.9% (formula 4). The profit margin, before and after TDC, shows that the tax burden represents a structural problem as it restricts the generation of enough cash flow not only to meet investment requirements, but also to obtain acceptable profits after taxes. If the oil price is taken into consideration along with the indicators above, the payment of TDC, for the time being, and only descriptively, has the closest relation to the oil price, which, in financial terms, poses a high-opportunity cost to the other indicators (Figure 3). Pemex creates value and has of the oil industry highest EBITDA margins and BBTDC when analyzed using the method herein (Figure 4). Tax burden remains the main problem for the company, regardless of whether it continues focusing on extraction or seeks to reactivate the whole production chain (Pemex, 2019a,2020a). 3. Method 3.1 Data collection and variables Data obtained monthly from variables for the period between 1977 and 2019 amount to 516 observations. They correspond to the oil price and the BS indicators, which are described in Table 1. Data were obtained from the Subdirecci on de Programaci on y Presupuestaci on de la Direcci on Corporativa de Finanzas de Pemex (Subdivision of Planning and Budgeting of Pemex’s Corporate Direction of Finance) and the Sistema de Informaci on Econ omica del Banco de M exico (SIE) (Bank of Mexico’s Economic Information System, SIE for its Spanish Source(s): Own elaboration based on SIE (2019) and CEFP (2019) 0.00 20.00 40.00 60.00 80.00 100.00 120.00 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US$ per barrel Millions of daily barrels Oil production Calculated oil price Actual oil price Figure 2. Oil production and oil price, 1977–2019 Oil price fluctuations in Pemex 179 acronym). In this period, information availability and the possibility of having a homogeneous database was key, which was built for a total of 42 years –a period long enough to reaffirm what some studies conclude about Pemex profitability before TDC (Cornejo et al., 2012;Morales et al., 2013). For simplicity, Table 2 presents BS variables on an annual basis (in dollars and their averages), following the corresponding financial sequence. 3.2 Analytical procedures The VAR model has been useful in several studies on oil price (Mirmirani and Cheng Li, 2004; Garc ıaet al., 2018;Ali et al., 2018;Cologni and Manera, 2008;Muhammad et al., 2018). BS indicators Description Formulas Profit margin (%) Total income Including income from sale of goods and services (internal and external), as well as other sources 1. Operational balance (OB) 5Total Income -Operating cost 1. OB 578.0% Sales revenue Internal and external sales of goods and services Operating cost Personal services, acquisitions and others Investment Physical and financial investment, as well as transfers to Pemex’s subsidiaries 2. Balance before TDC (BBTDC) 5Operational balance–Investment 2. BBTDC 558.7% Payment of Taxes, Duties and Contributions (TDC)* Payment of taxes, duties and contributions (TDC) 3. Balance after TDC (BATDC) 5balance before TDC -TDC 3. BATDC 54.5% Interest payment Expenses resulting from the payment of interest on domestic and foreign debt 4. Financial balance (FB) 5balance after TDC – Interest payment 4. FB 52.9% Note(s): *Indicator linked to the company’s tax burden Source(s): Own calculations based on data from Pemex’s Financial Balance for 1977–2019 (Pemex, 2019a) Source(s): Own elaboration based on Pemex (2019a) and SIE (2019) 0.00 20.00 40.00 60.00 80.00 100.00 120.00 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US$ per barrel Millions of US$ Investment Operating cost Payment of Taxes, Duties and Contributions (TDC) Interest payment Sales revenue Total income Oil price Table 1. Indicators from Pemex’s financial balance and average profit margin, 1977–2019 Figure 3. Oil price and Pemex’s financial indicators, 1977–2019 JEFAS 27,53 180 The analysis in Section 3 allowed identifying some important relationships between oil price and BS variables, which can be verified with a VAR model, whose assumptions are that the series used are non-stationary and that there are lagged effects with each other and with the variables. Furthermore, there is endogeneity among variables; at one end, the selected variables depend on each other. The dynamic relationships of variables are analyzed with the Granger causality test, which determines causality unidirectionality or bidirectionality, and the IRF, which estimates the magnitude and persistence of the responses of variables to unexpected shocks (Ismail et al., 2021;Kamaljit and Vashishtha, 2020). The VAR model accommodates the fact that Pemex management responds to conflicting interests that a linear model could not represent (Sims, 1982;Rodr ıguez, 2011). As mentioned, the findings of Iqbal and Shetty (2018) and ElFayoumi (2018), who applied the VAR model to analyze the impact of oil price variations at the company level, were the most useful. About the procedure, the augmented-Dickey–Fuller unit root test corroborates series stationarity. The lagged test, Akaike information criterion (AIC), determines the lagged effects of variables. The χ 2 test obtains the significance level. The Granger causality test defines the unidirectional or multidirectional character of lagged values of variables; the significant relationships obtained are measured with the IRF (Ehrmann and Valla, 2003). 4. Results Figure 5 shows the original series. Pemex’s financial indicators and the oil price show high volatility (short-term cycles, as well as stationary and random effects) and non-stationarity (a mean and variance that change through time, thus displaying a trend), which is confirmed by performing the augmented-Dickey–Fuller test for unit root (Table 3). By applying a logarithmic transformation to obtain stationary data, a system of seven equations, with a 12-month difference is obtained as follows: Growth in investment ¼lnðinvestmenttÞlnðinvestmentt−12Þ(1) Growth in operating cost ¼lnðoperating costtÞlnðoperating costt−12Þ(2) Growth in TDC ¼lnðTDCtÞlnðTDCt−12Þ(3) Source(s): Own calculations based on Pemex (2019a) and SIE (2019) – 200,000 – 100,000 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Millions of US$ OperaƟonal Balance (average income margin = 78%) Balance Before TDC (average income margin = 58.7%) Balance AŌer TDC (average income margin = 4.5%) Financial Balance (average income margin = -2.9%) Figure 4. Pemex’s financial balance, 1977–2019 Oil price fluctuations in Pemex 181 Year Total income Operating Cost Operational balance (OB) Investment Balance before TDC (BBTDC) Payment of taxes, duties and contributions (TDC) Balance after TDC (BATDC) Interests Financial balance (FB) 1977 21,260 11,165 10,095 9,482 613 4,215 3,603 1,080 4,683 1978 29,965 12,578 17,387 18,993 1,606 7,664 9,270 1,842 11,112 1979 49,402 17,864 31,538 25,654 5,884 13,143 7,259 4,046 11,305 1980 90,995 25,591 65,405 32,478 32,927 44,048 11,122 7,760 18,882 1981 139,023 49,296 89,727 61,252 28,475 73,748 45,273 16,953 62,226 1982 100,403 29,341 71,062 32,341 38,721 36,196 2,525 16,383 13,857 1983 95,994 14,313 81,682 12,209 69,473 40,885 28,588 11,749 16,839 1984 131,919 23,819 108,100 13,762 94,338 54,452 39,887 16,606 23,281 1985 119,223 41,110 78,113 10,782 67,331 51,152 16,179 8,797 7,383 1986 81,561 37,756 43,805 8,539 35,266 29,439 5,827 7,958 2,131 1987 73,353 17,548 55,805 8,639 47,166 37,052 10,114 6,942 3,172 1988 83,905 22,335 61,569 10,613 50,956 38,133 12,823 8,615 4,208 1989 84,359 22,647 61,711 11,144 50,567 42,051 8,516 10,818 2,303 1990 103,383 23,352 80,031 11,703 68,328 53,112 15,216 12,657 2,559 1991 118,327 27,779 90,548 14,163 76,385 66,311 10,073 7,550 2,523 1992 118,780 29,804 88,976 15,853 73,122 67,464 5,658 6,880 1,222 1993 127,362 28,723 98,639 14,873 83,766 71,096 12,670 6,358 6,313 1994 106,978 26,136 80,842 16,614 64,228 53,468 10,760 7,228 3,533 1995 113,103 16,127 96,977 11,656 85,320 69,139 16,181 11,291 4,890 1996 145,488 18,279 127,209 16,182 111,027 87,548 23,478 10,423 13,056 1997 171,069 24,182 146,887 21,893 124,994 109,762 15,232 9,738 5,493 1998 117,431 25,942 91,490 20,275 71,214 66,588 4,627 7,639 3,013 1999 117,456 27,783 89,673 15,889 73,783 53,234 20,549 8,014 12,535 2000 200,529 29,870 170,659 12,195 158,464 141,247 17,218 10,563 6,655 2001 207,974 36,531 171,443 20,709 150,734 146,013 4,721 9,677 4,956 2002 175,458 40,897 134,561 17,441 117,120 78,286 38,834 8,315 30,519 2003 250,613 40,581 210,033 18,692 191,341 156,866 34,475 13,974 20,500 2004 306,900 37,780 269,120 20,095 249,025 201,660 47,365 12,852 34,513 2005 382,269 51,268 331,001 14,829 316,172 276,469 39,703 15,875 23,828 2006 491,063 57,911 433,151 14,862 418,289 367,687 50,602 22,075 28,527 2007 497,696 66,148 431,548 20,384 411,164 314,453 96,711 21,449 75,261 (continued) Table 2. Pemex’s financial balance, 1977– 2019 (US$) JEFAS 27,53 182 Operating cost over investment Interest over investment Source(s): Own calculations –0.05 0 0.05 0.1 0.15 0.2 0.25 0.3 012345678 Growth rate Month –0.12 –0.1 –0.08 –0.06 –0.04 –0.02 0 012345678 Growth rate Month Source(s): Own calculations – 0.6 – 0.4 – 0.2 0 0.2 0.4 0.6 0.8 1 1.2 012345678 Growth rate Month TDC Sales Interest Source(s): Own calculations 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 012345678 Growth rate Month Figure 7. IRF operating cost and interest over investment Figure 8. IRF price over TDC, sales and interest Figure 9. IRF sales over TDC Oil price fluctuations in Pemex 189 4.4 TDC and price The payment of TDC negatively affects price. A 1% increase causes a decrease of 0.005% in the first month, which tends to worsen in the following months (see Figure 10). The interpretation here has to do with the nature of the price as a variable dictated by the international market (Cologni and Manera, 2008;Muhammad et al., 2018;Derbali et al., 2019). Pemex’s stability and financial viability is assessed according to price volatility and the impact it has on its finances. If Pemex reacts by increasing TDC during high-price seasons, it would be sending a wrong message to the market; it would be considered insolvent to meet its current liabilities. Pemex is the only case in the world where price expansion does not increase investment but rather the tax cost of producing oil. 4.5 Analysis of results From the obtained results, the most important ones are those showing a relationship between investment (1) and TDC (3) equations. The first equation shows that Pemex’s physical and financial investments are unrelated to price cycles and sales; in other words, these do not have any impact on investment. It is worth noting that from 1977 to 2019 prices experienced increased seasons, staying at and even exceeding US$100 per barrel. The surplus generated from oil market dynamics, which in Mexico reported on an average annual extraordinary income of almost US$500,000m during a whole decade (2005–2014), was absorbed by the tax burden (SIE, 2019). The second equation shows that an increase in price and sales of 1% caused tax increases of 0.36 and 0.38%, respectively. In other words, the surplus resulting from price increases was extracted by increases in Pemex’s tax burden and, on top of that, investment was not encouraged, all of which accounts for production cutbacks at every level of the oil production company (Fuentes and C ardenas, 2010;Silva et al.,2021;Hern andez and Bonilla, 2020). On the other hand, investment would have a positive increase of 0.24% as a result of a 1% increase in operating cost; but considering equation (2) apart, it is also unrelated to price. In fact, it only depends on itself in the model. Therefore, labor, materials, maintenance costs and general services do not increase as price increases. On the contrary, Investment decreases when the payment of interest increases, a variable on which price did have a positive effect. Pemex is the most indebted company in the world, and since the company gets more resources during certain periods of price increases, incentives have been created to cover the cost of debt over other priorities; under normal conditions or during low-price periods, debt acquisition tends to increase in order to pay TDC (Fitch Ratings, 2020). Source(s): Own calculations – 0.3 – 0.25 – 0.2 – 0.15 – 0.1 – 0.05 0 012345678 Growth rate Month Figure 10. IRF TDC over price JEFAS 27,53 190 In general, the most notable result of the model is that price increases –reflected by financial sequence in business income growth –are absorbed by three variables, which in order of importance are as follows: TDC, sales and interests; on the other hand, it does not have any impact on the other two variables: investment and operating cost. From a corporate finance approach, Pemex lacks management oriented to value creation (Huizar, 2015;L opez and Nava, 2018). Strategic investment has not been considered in making long-term operational and financial decisions and it will not be ifpayingexcessive taxes remains a structural problem. The results validate the working hypothesis: in Pemex financial management, the interest of using it for fiscal objectives prevails, and the oil price and corporate income derived from it do not have a positive impact on financial balance, since the entire effect is absorbed by TDC. 5. Discussion Pemex manages a strategic resource for the Mexican economy and its contribution to public revenues is significant. The research corroborated with an empirical method (VAR model), which several studies have already analyzed about Pemex’s fiscal burden (Fuentes and C ardenas, 2010;Baz an and Gonz alez, 2011;Cornejo et al., 2012;Morales et al., 2013;Anderson and Park, 2016). The information from the BS was essential. The influence of the oil price is easily corroborated in a “petro-state”like Mexico, but the most relevant thing was to know how it affected Pemex’s corporate income and its distribution among the different financial expenditures of the company. In that sense, the results of this research have important implications for Pemex’s financial sustainability. In the realm of economic policy, they invite those responsible for the energy sector to evaluate the role it has played in the national economy. It is necessary to assess whether its finances are being managed in a balanced way and whether price expansions have really benefited from it. The results show that they have not. First, the relationship found between oil price and TDC is strong evidence of Pemex’s fiscal role in the national economy and of its main function as a provider of public funds (S anchez, 2016;Salazar and Venegas, 2018). Second, when weighing the price–investment relationship, it is also evidence of the negative impact that it generates on productivity, since it restricts investment in aspects such as infrastructure, technological development and human capital. The fiscal role of Pemex prevails, and according to the financial balance, the financial and productive cost of this is high, since oil revenues do not favor savings and investment (Huizar, 2015;Rodr ıguez and L opez, 2019). The main recommendation is that fiscal and energy policy should reconcile objectives, implementing a progressive tax reduction plan. In the academic and research fields, a new perspective is provided by focusing on Pemex through its BS, which is a key instrument that until now the literature has overlooked. Knowing, in terms of accounting and quantitatively, the reaction of financial variables to price movements, in particular of TDC, is a significant contribution to studies that have worked on the issue of the tax burden but with a qualitative or quantitative perspective that fails to capture the real impact of the tax burden at a corporate scale (Garc ıaet al., 2018;Sierra and M endez, 2017;Dur an-Encalada and Paucar-C aceres, 2012). At the same time, it opens an opportunity to further explore the micro-economic part of Pemex in its different facets, since investment, in the results of the model, is not affected by price and is a fundamental variable at the corporate level due to its relationship with asset formation, productivity and competitiveness. 6. Conclusions The research examined the impact of oil price on Pemex BS in the period 1977–2019. In the VAR model, the most significant relationship found with the Granger causality test and IRF was that of price –TDC. In the face of price increases, TDC also increased (immediately and over time). Oil price fluctuations in Pemex 191 In contrast, there was no evidence that price affected Investment; it is a variable disconnected from price cycles. The benefit in total income from oil price expansions was diluted by subtracting TDC payment, which is the highest BS outlay. The revenue margin and profit after TDC were mostly negative; therefore, Pemex is a company managed for fiscal purposes. The results managed to give quantitative support to the study of the Pemex tax burden. It is suggested that future research should approach Pemex from micro-economic, financial and accounting theory. For example, going deeper into the data of its BS or income statement, whose impacts are sectorial and macro-economic. It would be interesting to study how the investment affects the formation of public capital in the sector –derived from the null impact that the price of oil has on it, associating this concept with the investment destined for productive infrastructure, research, and development of technology –which is registered in its BS, or analyze the trajectory of Pemex’s corporate debt, which is the highest in the world and takes away about 10% of its total annual income through interest payments. Both perspectives could have important political implications at the national, sectoral and corporate levels. Let us remember that oil revenues account for one-third of the country’s income, which determines Pemex’s fiscal burden, its disposable income and its capacity to finance investment. References Abboud, A. and Betz, M. (2021), “The local economic impacts of the oil and gas industry: boom, bust and resilience to shocks”,Energy Economics, Vol. 99, pp. 1-24. Alekperov, V. (2015), “A new outlook for the global oil industry”,Horizons: Journal of International Relations and Sustainable Development, Vol. 3, pp. 226-233. Ali, M., Abass, S. and Rossi, M. (2018), “A treatise on oil price shocks and their implications for the UK financial sector. Analysis based on time-varing structural VAR model”,The Manchester School, Vol. 86 No. 5, pp. 586-621.  Alvarez, A. (2014), “Economic integration and energy in Mexico, before and after NAFTA”, International Journal of Political Economy, Vol. 43 No. 2, pp. 82-99. Anderson, O. and Park, J. (2016), “South of the border, down Mexico way: the past, present and future of petroleum development in Mexico”,Natural Resources Journal, Vol. 56 No. 2, pp. 257-290. Baumeister, C. and Kilian, L. (2016), “Forty years of oil price fluctuations: why the price of oil may still surprise us”,Journal of Economic Perspectives, Vol. 30 No. 2, pp. 139-160. Baz an, G. and Gonz alez, C. (2011), “Mexican oil industry: shifting to difficult oil”,Energy and Enviroment, Vol. 22 No. 5, pp. 573-578. Beshears, J. (2013), “The performance of corporate alliances: evidence from oil and gas drilling in the Gulf of Mexico”,Journal of Financial Economics, Vol. 110 No. 2, pp. 324-346. Blake, A. and Roberts, M. (2006), “Comparing petroleum fiscal regimes under oil price uncertainty”, Resources Policy, Vol. 31 No. 2, pp. 95-105. Bouoiyour, J.S., Hussain, S. and Shahbaz, M. (2017), “Response of stock returns to oil price shocks: evidence from oil importing and exporting country”,Journal of Economic Integration, Vol. 32 No. 4, pp. 913-936. Cabrera, A. and D ıaz, M.  A. (2021), “Tensiones por cultura organizacional en Petr oleos Mexicanos, Regi on Sur”,Revista Mexicana de Sociolog ıa, Vol. 78 No. 4, pp. 713-740. CEFP (2019), Presupuesto y Gasto, available at: https://www.cefp.gob.mx/new/gasto.php (accessed 16-22 November 2019). Cologni, A. and Manera, M. (2008), “Oil prices, inflation and interest rates in a structural cointegrated VAR model for the G-7 countries”,Energy Economics, Vol. 30 No. 3, pp. 856-888. Cornejo, R., Ortega, R. and Villegas, E. (2012), “Pemex desde el punto de vista financiero en el entorno internaciona”,Paper Presented at the XVII Congreso Internacional de Contadur ıa, Administraci on e Inform atica, 3-5 de octubre de 2012, Ciudad de M exico. JEFAS 27,53 192 Derbali, A., Wu, S. and Jamel, L. (2019), “OPEC news and predictability of energy futures returns and volatility: evidence from a conditional quantile regression”,Journal of Economics Finance and Administrative Science, Vol. 25 No. 50, pp. 239-259. Dur an-Encalada, J. and Paucar-Caceres, A. (2012), “A system dynamics sustainable business model for Petroleos Mexicanos (Pemex): case based on the Global Reporting Initiative”,The Journal of the Operational Research Society, Vol. 63 No. 8, pp. 1065-1078. Ehrmann, M. and Valla, N. (2003), “Regime-dependent impulse response functions in a Markovswitching vector autoregression model”,Economics Letters, Vol. 78, pp. 295-299. EIA (2020), “International ranking world”, available at: https://www.eia.gov/international/rankings/ world?pa512&u50&f5A&v5none&y501%2F01%2F2017 (accessed 17 May 2020). ElFayoumi, K. (2018), “The balance sheet effects of oil market shocks: an industry level analysis”, Journal of Banking and Finance, Vol. 95, pp. 112-127. Fuentes, N. and C ardenas, A. (2010), “Evaluaci on del impacto de alternativas de utilizaci on de los excedentes petroleros sobre la econom ıa mexicana. Una aplicaci on del modelo insumoproducto”,Econom ıa Mexicana Nueva  Epoca, Vol. XIX No. 2, pp. 379-399. Garc ıa, S., Saucedo, E. and Velasco, A. (2018), “Los efectos del precio del petr oleo en el Tipo de cambio spot mxn/usd, un an alisis VAR para M exico de 1991 a 2017”,An alisis Econ omico, Vol. XXXIII No. 84, pp. 33-56. Hern andez, J. and Bonilla, D. (2020), “Examining Mexico’s energy policy under the 4T”,The Extractive Industries and Society, Vol. 7 No. 2, pp. 669-675. Huizar, R. (2015), “Surviving privatization in the era of neo-liberalism: a case study of Mexico’s oil company (PEMEX)”,The Extractive Industries and Society, Vol. 2, pp. 339-351. Iqbal, Z. and Shetty, S. (2018), “The impact of oil price shocks on capital spending in the oil and gas industry: a VAR analysis at the firm level”,Managerial Finance, Vol. 44 No. 11, pp. 1347-1363. Ismail, E., Cagrı, D. and Dibooglu, S. (2021), “Renewable and non-renewable energy consumption and economic growth in the US: a Markov-Switching VAR analysis”,Energy and Enviroment, Vol. 32 No. 3, pp. 519-541. Kamaljit, V. and Vashishtha, S. (2020), “Does any relationship between energy consumption and economic growth exist in India? A VAR model analysis”,OPEC Energy Review, Vol. 44 No. 3, pp. 34-347. L opez, J. and Nava, K.M. (2018), “The road the internationalization of a Latin state company: the case of Pemex”,Globalization, Competitiveness and Gobernability Journal, Vol. 2 No. 12, pp. 97-114. Mart ınez, N. (2004), “Oil policies and privatization strategies in Mexico: implications for the petrochemical sector and its production spaces”,Energy Policy, Vol. 32 No. 18, pp. 2035-2047. Menchar, M.A. (2015), “Estado y reforma energ etica. Problemas del Desarrollo”,Revista Latinoamericana de Econom ıa, Vol. 46 No. 183, pp. 117-139. Mirmirani, S. and Cheng Li, H. (2004), “A comparison of VAR and neural networks with genetic algorithm in forecasting price oil”, in Binner, J.M., Kendall, G. and Chen, S.-H. (Eds), Applications of Artificial Intelligence in Finance and Economics, Emerald Group Publishing, Bingley, pp. 203-223. Morales, R., L opez, F. and Cornejo, R. (2013), “An alisis de la rentabilidad de las principales empresas petroleras en Am erica: mito y realidad sobre la viabilidad financiera de Pemex”, available at: http://congreso.investiga.fca.unam.mx/docs/xviii/docs/11.02.pdf (accessed 17 July 2021). Muhammad, A., Lutchmee, N., Muhammad, S. and Nii, A. (2018), “Implications of oil prices shocks for the major emerging economies: a comparative analysis of BRICS”,Energy Economics, Vol. 76, pp. 76-88. Pemex (2019a), Balance Primario y Financiero de Pemex y sus organismos subsidiarios, Pemex. Pemex (2019b), Plan de Negocios de Petr oleos Mexicanos y sus Empresas Productivas Subsidiarias 2019-2023, Por el rescate de la soberan ıa, Pemex. Pemex (2020a), BCP Securities Annual Conference, Pemex. Oil price fluctuations in Pemex 193 Pemex (2020b), Indicadores operativos y financieros, Pemex. Priest, T. (2012), “The dilemmas of oil empire”,The Journal of American History, Vol. 99 No. 1, pp. 236-252. Ratings, F. (2020), “Fitch Baja Calificaci on de PEMEX a ‘A(mex)’; Perspectiva Negativa”, available at: https://www.fitchratings.com/research/es/structured-finance/fitch-baja-calificacion-de-pemex-a- mex-perspectiva-negativa-03-04-2020 (accessed 03 April 2020). Reed, M., Najarzadeh, R. and Sadati, S. (2019), “Analizyng the relationshp between budget deficit, current account deficit, and government debt sustainability”,Journal of WEI Business and Economics, Vol. 8, pp. 20-31. Rodr ıguez, H. (2011), “Estudio del fen omeno de inflaci on importada v ıa precios del petr oleo y su aplicaci on al caso colombiano mediante el uso de modelos VAR para el periodo 2000-2009”, Estudios Gerenciales, Vol. 27 No. 121, pp. 79-97. Rodr ıguez, D. and L opez, F. (2019), “Efectos de la incertidumbre de los precios del petr oleo en el crecimiento econ omico de M exico”,Investigaci on Econ omica, Vol. 78 No. 309, pp. 80-106. S anchez, P. (2016), “Whatever happened to the Mexican oil bonanza? The challenges of Mexico’s new oil fund”,Natural Resources Journal, Vol. 56 No. 2, pp. 291-312. Salazar, H. and Venegas, F. (2018), “Impacto del uso de energ ıa y formaci on bruta de capital en el crecimiento econ omico. Un an alisis de datos de panel en 73 pa ıses agrupados por nivel de ingreso y producci on de petr oleo”,El Trimestre Econ omico, Vol. 85 No. 338, pp. 341-343. Shen, Y., Xumpeng, S. and Hari, M. (2018), “Risk transmission mechanism between energy markets: a VAR for VaR approach”,Energy Economics, Vol. 75, pp. 377-388. SIE (2019), “Ingresos y gastos de Pemex”, available at: https://www.banxico.org.mx/SieInternet/ consultarDirectorioInternetAction.do?sector59&accion5consultarCuadro&idCuadro5CG4&l ocale5es (accessed 7-20 November 2019). Sierra, G. and M endez, D. (2017), “Un modelo de inversi on  optima para fondos soberanos: caso fondo mexicano del petr oleo para la estabilizaci on y el desarrollo”,El Trimestre Econ omico, Vol. 84 No. 335, pp. 731-756. Silva, D., Bonilla, D. and Moreno, A. (2021), “Energy reform in Mexico: its impact on Pemex’s productivity”,The Extractive Industries and Society, Vol. 8 No. 2, pp. 1-12. Sims, C. (1982), “Policy analysis with econometric models”,Brookings Papers on Economy Activity No. 1, pp. 107-164. Stock, J.H. and Watson, M.W. (2001), “Vector autoregresssion”,Journal of Economic Perspectives, Vol. 15 No. 4, pp. 101-115. Waheed, R., Wei, C. and Sarwar, S. (2018), “Impact of oil prices on firm stock return: industry-wise analysis”,Empirical Economics, Vol. 55 No. 2, pp. 765-780. About the author Ang elica Tacuba holds a PhD in Economics from Universidad Nacional Aut onoma de M exico (UNAM). She is candidate in Sistema Nacional de Investigadores of Consejo Nacional de Ciencia y Tecnolog ıa (Conacyt) and is researcher at Instituto de Investigaciones Econ omicas (IIEc-UNAM). She has been professor at Universidad Aut onoma Metropolitana (UAM), researcher at Benem erita Universidad Aut onoma de Puebla (BUAP) and external consultant to the representative office in Mexico of the Food and Agriculture Organization of the United Nations (FAO). Her publication topics include rural development, public finance and energy policy. Ang elica Tacuba can be contacted at: [email protected] For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: [email protected] JEFAS 27,53 194