Links to remarks by: José Alberro, Michael J. Economides, Sandy Tolan

Oil: Gift from the Devil?
Jason Felch, Graduate School of Journalism

Will Mexico privatize its sacrosanct petroleum industry? The question has come to the fore once again, thanks to the threat of war in the Middle East, recent talk of increased Mexican production, and President Vicente Fox's lurking campaign promise to reform Mexico's energy sector.

Yet the thought of privatizing PEMEX, Mexico's national petroleum company, cannot be raised without also raising the historical shadow that has accompanied it since birth, that of Lazaro Cardenas.

Cardenas, the PRI's founding father, nationalized Mexico's oil industry in a defiant move against foreign companies in 1938. In the words of Daniel Yergin, who chronicles the history of the petroleum industry in his book The Prize, nationalization was "a great symbolic and passionate act of resistance to foreign control, which would become central to the spirit of nationalism that tied the country together."

Today that glue still binds, and the Mexican voter may rule out the privatization of PEMEX, which, according to some analysts, Fox favors. This was the basis of a lively conversation between a visiting journalist, a well-known petroleum engineering professor and a former Pemex CEO held at the Center for Latin American Studies on September 12.

Sandy Tolan, a veteran journalist who has covered petroleum and natural resource issues, is teaching a class on the collision of politics and petroleum in Latin America this fall at UC Berkeley. He was joined in conversation by Michael Economides, professor of Engineering at the University of Houston and a well-known energy analyst, and Jose Alberro, former CEO of PEMEX Gas y Petroquimica Basica and currently a director of LECG, an economic consulting firm.

The discussion, titled "The Politics of Petroleum and the Future of the US-Mexican Relationship," was the first in a series of events that will focus on the evolving relationship between Mexico and the United States.

José Alberro, former CEO of Pemex Gas y Petroquímica Básica, explains the relationship between oil, Pemex, and petroleros (oil workers and their unions) in modern Mexico.

The question of privatization is a complex, technical one, and should not be treated simply, Alberro said. He readily admits that PEMEX suffers for corruption and gross inefficiencies. "An integrated monopoly, like PEMEX, is the surest recipe for inefficiency," he said. But, citing the recent corruption scandal involving Enron, "to go from a nationalized corrupt company to a private, foreign corrupt company is not a good tradeoff."

The debate in Mexico is often framed in "stubborn, myopic, and irrational" arguments, Alberro said. Oil's symbolic value in Mexico has taken on larger proportions than its economic value. Mexico's biggest challenge, according to Alberro, is to create "a non-ideological solution."

Michael J. Economides, professor of engineering at the University of Houston, describes the future of oil production in Latin America, especially pointing out the pivotal role of Venezuela.

Such a solution, Economides argued, an apertura for foreign oil companies, will come from the semi-privatization of Mexico's energy sector. While PEMEX's existing business is likely to remain in the hands of the government, new reserves, particularly deep-water wells in the Gulf of Mexico, may be given a special classification. This would allow the entry of large foreign investors, without which the multi-billion dollar platforms needed to extract the oil could not be built, Economides said.

Economides also believes Mexico's natural gas industry may be sold off to foreign companies, a fact that could have a significant impact on Mexico's energy future. It is not oil but natural gas, Economides argues in his book The Color of Oil, that will dominate the energy markets in the near future. With a gas supply of about 45 trillion cubic feet (comparable to the US's estimated supply, but more complex to extract) Mexico will become a net gas importer by 2010, Economides estimates.

How will this shift in the energy balance affect the relationship between Mexico and the US, given that a significant factor today is Mexico's ability to provide the US with some of the vast amount of oil it requires for economic growth? It was a question anticipated by Tolan, who described a telling visit to another of Latin America's oil producing countries, Ecuador. Though that country's reserves are estimated to last just seven more years, few there are planning for a post-petroleum economy, Tolan said. In fact, production is being doubled.

The three panelists, despite differences in approach to the oil dilemma, did manage to agree on one thing: oil, for all its apparent good, may very well be a gift from the Devil. On the verge of nationalization, Lazaro Cardenas is reported to have said, it is better to destroy the oil fields than let them be an obstacle to national development.

 

Sandy Tolan, journalist and lecturer at Berkeley, talks with a student after the discussion.