• It represents less than 5% of its GDP and less than 10% of its exports.
• On the contrary, 20% of the Treasury's revenues come from PEMEX's and an additional 10% comes from taxes paid on fuel consumption.
• The size of the oil and gas resource base, as well as its optimal rate of extraction, are a cause for concern both in Washington and in Mexico City. · The financial weakness of the Mexican government has entailed low investment in the energy sector.
• In Mexico, there is concern that such a level of production would wreck the economy as it did in the late 1970's and early 1980's.

• · Industrial competitiveness is hampered by the monopolies.
• In 2000, the price of electricity was 17.4% higher in Mexico than in its 12 biggest trading partners.
• Imports of natural gas have grown since 1995 and will soon reach a billion cubic feet a day.
• The production of the 11 most important petrochemical feedstocks (representing two thirds of domestic sales) decreased at an average annual rate of 4% and imports grew at 16%.
• Between 1996 and 2001, prices of those feedstocks were, on average, 9.1% higher than in international markets.

• In some cases privatizations have led to massive government bailouts with a significant cost to the public treasury: banks and IPAB, sugar refineries, tollways, airlines.
• The ENRON scandal looms large; American companies need to exhibit more corporate responsibility before they are thought of as a viable alternative to government owned monopolies.
• Substituting for corrupt public officials with corrupt foreign businessman hardly seems an improvement.
• Storage, marketing and distribution of natural gas, as well as electricity generation, have already been liberalized.
• US corporations have invested little in the sector. They have demanded that the rules be modified to accommodate their interests and have indicated that they will not participate unless they have access to the oil and gas reserves in the ground and an electricity market is created.
• On the contrary, European and Asian companies have accepted the regulatory environment and have invested 10 billion dollars in the sector.
• Liberalization in the energy sector is likely to proceed in a cautious manner and building on mechanisms already put in place.

• The social fabric is straining: indigenous people get massacred over land rights, water rights, religious feuds and drug turf battles; women get slaughtered in Ciudad Juarez; San Miguel Atenco successfully blocked the construction of a new Mexico City airport and recently declared itself "autonomous", like the zapatistas in Chiapas did.
• Populist leaders that push anti-free market and anti-U.S. platforms continue to have success with the disenfranchised. Oil remains the symbol of an old Mexico where the evils of globalization had not become evident. A part of Mexico has embraced the twenty-first century, but another has the explosive capability of blocking accession.
• A difference should be made between oil, PEMEX and the petroleros. The current criminal indictment of the union leadership will drive a wedge in the political perception of the difference between oil reserves, owned by the nation, PEMEX, created in 1938 with the nationalized assets of foreign companies, and the petroleros, all of whose leadership have been long-time PRI members.
• The internal symbolic value of the oil is larger than its economic value or its strategic value in international relations.
• Paraphrasing Friedrich Katz, one could say that the petroleros could start a revolution because they refuse to enter the twenty-first century.

• · Most significant bilateral US-Mexico treaty since the Treaty of Guadalupe Hidalgo in 1848 when the US annexed half of Mexico's territory.
• Based on the formal equality of sovereign Nations.
• The US pressured to the point of almost breaking the negotiations that opening the energy sector to foreign investment was in Mexico's self-interest. Mexico resisted.
• The energy chapter is Kafkaesque, unless it is understood to be a vehicle to craft a political equilibrium and make the whole Agreement viable.
• Ten years after the conclusion of the NAFTA negotiations, the US national interest seems to be for Mexico to increase oil production.
• What will the future bear?

Mexican Oil Exports as a share of Total Exports (%)

 

2. OIL AND MEXICAN SOVEREIGNTY

Beyond the global politics of World War II, Lazaro Cardenas' decision remains one of the most significant acts of national sovereignty over natural resources ever taken. Its effects rippled forward for decades.

The nationalization of oil in Mexico helped define decades of struggle in other parts of the world; it emboldened other governments - not withstanding the CIA-backed coup in Iran - to demand better terms of trade, and put pressure on oil companies, ever fearing another nationalization, to offer more to produce and export petroleum. All along, and today, at the heart of this has been a central question: to whom does the oil belong? One has only to mention the words Iraq or Venezuela to know how much this question resonates today.

Beyond any global politics, of course, the nationalization of oil has formed a huge part of the Mexican people's own sense of independence, and contributed to a broader sense of national dignity and self-respect - so much so that it is enshrined in the Mexican Constitution under articles 27 and 28. Perhaps this is what made so painfully ironic the signing over as collateral Mexico's future oil revenues to the U.S. in exchange for the $50 billion in loan guarantees, known as the Emergency Stabilization Package, engineered under Presidents Clinton and Zedillo in 1995 after the crash of the Mexican peso.

So my first series of questions: How painful was that for Mexico? How much irony was perceived? Was the nature of the collateral any reason why the loan was paid off so quickly, ahead of schedule? And was there a sense in Mexico, to wit, 'We'll never do this again'? Or was it considered another step in the migration to an integrated global economy?

3. WILL PEMEX EVER BE PRIVATIZED?

The fact that Mexico's sovereignty over its own resources is part of the constitution makes it extremely difficult - culturally, politically, and legally - even for a free trade reformer like President Vicente Fox to advance a privitization agenda when it comes to Petroleos Mexicanos, or PEMEX. He's backtracked some since his earlier, bolder statements on the matter of Pemex and privatization,but there are reports of some testing of the waters. This, from Dow Jones news service:

"Mexico Seeks Major Constitution Reform For Energy Revamp"
Wed Aug 14,12:31 PM ET
MEXICO CITY -(Dow Jones)- The government of Mexican President Vicente Fox is seeking a major reform of two key chapters in Mexico's constitution to allow higher private participation in the country's energy sector, local newspapers reported Wednesday.

"By reforming article 27, the government would be able to open up to private investors some refining and dry gas operations. Crude oil and hydrocarbon production will remain under control of the federal government through its monopoly Petroleos Mexicanos, also known as Pemex."

And so, the next series of questions: Is this indeed a testing of the waters? President Fox backtracked, but is he now putting his toe in the water again? What are the prospects, longterm, for privitization of Pemex, and what would be the implications for Mexico's identity as well as its economy?

Given the repeated and ongoing corruption charges, most recently that PEMEX officials gave $170 million from Pemex to Labatista's unsuccessful PRI campaign, will it be more palatable for President Fox to consider privatizing Pemex? What are the prospects, and what impact would this have on Mexican identity, which is so linked to oil as a primary expression of sovereignty?

4. HOW LONG WILL MEXICO'S PETROLEUM LAST?

Mexico has increased its output about 13 percent to 3.65 million barrels a day. It is seeking financing for new development projects.

There is some talk of Mexico increasing its production to five million barrels a day. Why? Is this a sovereign act or one taken in consultation with the United States? Again, what is the relationship of the conflict in the Middle East with production decisions in Mexico and elsewhere in Latin America? It may be true that Mexico would seek on its own to increase production due to the higher price per barrel of oil likely to accompany war with Iraq. But it remains worth asking: To what extent are pressures being brought to bear on Mexico to increase its production due to any 'instability' in Iraq? To what extent are these kinds of discussions happening now, at what level? Are there understandings between Mexico and the U.S. - indeed, was there anything in the $40 billion loan guarantees under the Clinton administration that effectively put Mexican oil as collateral in U.S. hands - that promise additional production to the U.S. in times of so-called 'instability'?

It's apparent that these kinds of discussions, or pressures, were at work three years ago, when Iraq cut production in an effort to drive up world oil prices. Lawrence Goldstein, president of the Petroleum Industry Research Foundation, a research group funded by oil companies, said:

"I think you have to realize that OPEC is not a homogeneous entity. There are individuals who clearly would be pressured by the United States to respond if in fact Iraq were to withdraw the 2.3 million barrels a day of exports from the market. Understand we're moving into the peak seasonal demand globally when stocks are already tied, so that Iraq's withdrawal from the market if it were to occur and be sustained for a period would have a substantial impact on price if Saudi Arabia, Venezuela, and Mexico didn't respond. OPEC may be reluctant to increase supplies, but in that environment, I wouldn't be surprised if the U.S. government weren't already at this moment in consultation with Saudi Arabia, Venezuela and Mexico for some kind of contingency plan."

Given the current situation, what kind of consultations are going on now?

Another series of questions relates to long term supplies in Latin America - in at least every country besides Venezuela. Consider: In Mexico, the country's known reserves are 27-29 b/b. This means, at a rate of 5 million barrels a day, depletion within 15 years. Or, at the current rate, in just over 20 years. Perhaps more reserves will be found, but how much can one rely on that hope?

In 1963, Antonio Bermudez, the former Pemex secretary general, said: "It is illusory, and would be harmful, to pretend that petroleum produced and exported in large quantities could become the factotum of Mexico's economy or the panacea for Mexico's economic ills. Mexico does not wish ever to be forced to export such an indispensable energy and chemical resource."

So, a final series of questions: How much can one build an economic future upon the hope that more reserves will be found? And if there are no more large reserves, is this rate of production in Mexico's interest? Maybe yes, maybe no. There are both short term and long term arguments. But at least it helps explain why the U.S. is so keen on oil supplies in the Middle East, which are vastly more profound.

If you think the long-term supply issue is bad in Mexico, consider Ecuador: with only 2.1 billion barrels of known reserves, it has decided - or, been persuaded - to more than double its capacity to 800,000 b/d. At this rate, without the discovery of more known reserves, Ecuador's capacity could run out within seven years. This is an economy that, in part because of poor terms of trade in its huge exports of banana, shrimp, hearts of palm and the like, relies on oil revenues every bit as much as Mexico, perhaps more: half the national budget is dependent on oil revenues. Of course the prospect of more reserves being discovered certainly exists but, privately, officials in PetroEcuador express grave concerns.

So, another set of questions: How much concern is there about depletion? How much faith is there that there will be major new finds to extend Mexico's life as an oil exporter? What is that faith based on? And is anyone considering that there may not BE major new finds, and beginning to consider a post-petroleum economy in Mexico? In Ecuador, that phrase hasn't entered the language except with some of the activist and indigenous groups. Is this being seriously discussed in Mexico?