Monday, December 30, 2013

Mexico's PEMEX Revolution

A revolution is unfolding south of the border before our eyes, and we don't see it. The drug cartels killings command the media's attention, but Mexico is undergoing a peaceful revolution. It is opening up its energy industries to foreign investment. Mexico had three revolutions in the Twentieth Century, one violent, one economic, and one political. The first was the Mexican Revolution from about 1910 to 1920. Names like Pancho Villa and Zapata become famous to Americans. Political power at the end of the revolution was consolidated in the Institutional Revolutionary Party (PRI), which governed Mexico for 71 years. The second revolution occurred in 1938 when the government nationalized the petroleum industry into Petroleos Mexicanos, commonly known as PEMEX. The PEMEX monopoly was enshrined in the Mexican Constitution. The political revolution was in 2000, when Vicente Fox of the National Action Party (PAN) was elected president. PRI survived as a political party at the legislative and state level, and regained its Presidency in 2012, but Mexico is a more Democratic country now. The purpose of PEMEX evolved over the decades to be the financier of the Mexican government, contributing 40% of the nation’s public spending, as well as becoming over-staffed with excess employees. 60% of its $80.6 billion in revenues are paid out in royalties and taxes. It practices patronage on a large scale with corruption being widely believed. PEMEX is currently the 9th largest oil producer in the world, but its inefficiency and monopolistic practices are catching up to it and the country. Its production has fallen 25% since 2004. Mexico has to import natural gas from Texas to supply its businesses and consumers. The petroleum reserves recoverable by PEMEX are also shrinking because the government monopoly lacks the capital, expertise, equipment and resources to develop the offshore, deepwater Gulf resources and the shale oil reserves. The declining PEMEX is threatening the financial stability of the Mexican government. It needs more production and revenue from the country’s natural resources, especially oil, but PEMEX was threatening to go the way of Venezuela’s nationalized oil industry. The revolutionary response of PRI and PAN at the end of 2013 was to open up oil production to foreign companies. They will be able to retain some of the oil they produce. An estimated 128.7 billion barrels are recoverable with foreign investment. Current production is down to 2.5 million barrels/day. Estimates are that production could rise to 4 million barrels/day by 2025. If Mexico can substantially ramp up production, then North America (Canada, Mexico, and the United States) will become the largest oil producing region in the world. The Mexican left is apoplectic. PEMEX is part of Mexico’s national DNA. The leftist Democratic Revolution Party (PRD) is mounting for 2015 Mexico’s first national referendum to reverse the action while crying out “Treason.” It tried, but failed, though to organize large public demonstrations against the revolutionary act. The future of Mexico, a revolutionary future, is at issue.

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