Mexico's vital oil connection

THE role of petroleum here transcends its economic value. The 1938 expropriation of 17 United States and European oil companies, the last major event in the Mexican revolution, is still celebrated every March 18 as a ``day of national dignity.'' The creation of Petr'oleos Mexicanos (Pemex), the first integrated oil company in the third world, demonstrates that technically competent Mexicans can control their country's fate. And the 72 billion barrels of proven reserves represent Mexico's patrimony -- the wherewithal to spur industrialization, create jobs, and lift the standard of living for the nation's 78 million inhabitants, one-third of whom live in hardscrabble poverty.

For the moment, news of the terrible earthquakes that have rocked this nation will dominate the world's attention -- and the concerns and prayers of people everywhere.

Looking ahead, oil may well become increasingly important as a vital revenue source as the nation's leadership seeks to find the revenues necessary to rebuild from the current destruction.

Oil's practical significance has, in the past, led the Mexican government to set export prices, rather than rely on the free marketplace.

Such a strategy, which proved workable in the energy-hungry 1970s when Pemex prices exceeded those of OPEC, to which Mexico does not belong, cost the country some $6 billion in lost revenues in 1981 because officials failed to react quickly enough to an oil glut that shifted the sellers' market to one favoring buyers.

Pemex's director general, Mario Ram'on Beteta, is increasingly sensitive to world price fluctuations. Yet, he could not persuade President Miguel de la Madrid Hurtado to approve cuts in time to meet competition in June -- with the result that Mexico shipped abroad only 783,000 barrels per day (b.p.d.), half of its 1.5 million b.p.d. target.

Most of the customers returned after the Energy Ministry and Pemex announced on July 10 a reduction in charges for both Isthmus (light) and Maya (heavy) grade crude. Also published were differential rates according to the destiny of exports -- a move designed to stimulate shipments to Europe and Japan.

Still, the government insists on designating prices through the Foreign Trade Oil Committee, an interagency group chaired by Mr. Beteta. Although the committee ensures shared participation in -- and collective responsibility for -- pricing outcomes, decisionmaking-by-committee is a perilous practice in a soft oil market, where even brief delays can cost millions of dollars.

The danger is especially great because of likely developments, specifically, the probability of more oil for sale because of:

The opening of the Iraqi pipeline to Western Europe.

An additional 400,000 b.p.d. from the North Sea.

Diminished purchases by refiners which are between the summer driving season in the Northern Hemisphere and the winter period of increased fuel oil demand.

Possible expansion of output in Saudi Arabia.

Mexico can best use its black gold to benefit its people by discarding the taboo that commands government-fixed prices in favor of a more flexible, market-oriented approach that better permits adjustments to changing conditions.

George W. Grayson is John Marshall professor of government at the College of William and Mary.