In a country that depends on oil for about a third of federal revenue, higher crude prices has boosted government income and strengthened the peso, highlighting the upside to Mexico's bittersweet relationship with petroleum.Mexican oil was approaching an average of $16 on Wednesday,the highest level since November 1997. Mexican oil is sold through the state monopoly Pemex, the sixth-largest oil company in the world.

"It's helping maintain the trade balance relatively low andthat's helping the stability of the peso, which in turn is keeping inflation down," said Jonathan Heath, an independent Mexico City-based economist. "It's a virtuous circle."

Times have not always been so good. After the November 1997peak, oil prices fell into a slump that lasted more than a year, helping tilt Mexico's trade balance into the red.

Oil prices along with the Asian and Russian Financial crisesbattered Mexican Financialmarkets throughout 1998, forcing the government to enact three rounds of budget cuts that proved politically unpopular and took a bite out of economic growth.

Bust periods have led to even worse Financial crises. When oilprices slid in 1981 and 1982, Mexico was forced to devalue the peso and the economy plunged into recession.

So when the government penciled in an expected average oilprice of $9.25 per barrel for 1999 budget purposes, critics cast doubt on the government's ability to meet its goal of holding the budget deficit to 1.25 percent of Gross Domestic Product.

With prices climbing, however, the government revised itsaverage price estimate for 1999 to $9.80 per barrel in May.

But to make up for output cuts agreed with other oil producersearlier this year, Finance Minister Jose Angel Gurria said Mexico needed an average price for its crude oil exports of close to $10 per barrel.

"With crude prices so high it's making the 1.25 percent goalmuch more credible," said Juan Pablo Chavez, aneconomist with GlobalIdea.com in New York.

"It's still too early to say how the price will end the year,but at current levels it's more feasible that the government will achieve its average price target, and that will be reflected throughout public finances in Mexico," he said.

Meeting those goals does more than square the government'sbooks."It's good for the image of the country," said Pedro Vanegasof the CAPEM economic forecasting group.

With investors confident about Mexico, they have been morewilling to take positions in pesos, bidding the peso to 9.34 per dollar, its strongest level in six months and more than a six percent improvement versus the dollar this year.

Likewise, demand for Mexican Cetes (treasury bills) has risen,driving down the yield on benchmark one-month paper to 19.65 percent, its lowest rate of the year.