Oil privatisation central to Mexico’s economic overhaul

Oil privatisation central to Mexico’s economic overhaul

In an act that was met with mixed views by its public, Mexico’s nationalised oil sector has been opened for private investment for the first time in 75 years.

In December 2013 Mexico’s congress passed a constitutional reform which allows the state-owned monopolist Petróleos Mexicanos (Pemex) to partner with foreign companies such as oil giants Exxon Mobil Corporation and Chevron Corporation.

Mexico’s lucrative oil industry was first nationalised in 1938 by President Lázaro Cárdenas, a leader hailed by many as the hero of the people. Cárdenas’ move to expropriate foreign companies from the oil industry has long been a source of Mexican pride and a symbol for resistance against imperialism and foreign exploitation. In the decades that have followed, the Mexican government has firmly safeguarded Pemex’s monopoly – until now.

In power for the first time since before Cárdenas’ revolutionary term, the Institutional Revolutionary Party (PRI), led by Peña Nieto, sent shock waves through Mexico with the momentous decision. Reversing the nationalisation of oil is said to be the cornerstone of Peña Nieto’s economic strategy and indeed of his presidency.

First proposed in August 2013, initially the bill opened the door for foreign investment into the sector yet maintained a tight grip on Mexican oil. The final result however which was announced on 7 December by PRI and the centre-right National Action Party (PAN) entailed a lot more than originally suggested.

The new bill allows production sharing contracts as well as profit-sharing contracts, the latter meaning that barrels of oil will be divided between the government and oil companies at a ratio to be decided. Production sharing licences are also permitted, and foreign companies now have the opportunity to take control of oil at the wellhead in return for paying taxes and royalties. These payments will be made directly into a newly created oil holding trust at the Mexican Central Bank.

Protests against privatising oil were led by Andrés Manuel López Obrador, former mayor of Mexico City, and by Cuauhtémoc Cárdenas, founder of the leftist Democratic Revolution Party (PRD) and grandson of the man responsible for nationalising oil in Mexico, President Cárdenas. In a bid to fight against the contentious bill, the PRD submitted a petition with 1.7 million signatures demanding a referendum on the grounds that the decision to privatize oil goes against the will of the people.

Despite being a $75 billion industry, Mexican oil profits have fallen drastically behind U.S. and Canadian counterparts. A lack of investment and technological development has severely stunted oil and gas exploration whilst Mexico’s output of oil continues to lag behind competitors. The oil refining industry has long suffered from inflated costs and a desperate need for modernization. Mexican refineries consume a shocking 42 percent more energy in comparison to international averages. Losses experienced by Pemex in 2013 are estimated at $10 billion.

With Pemex having less dependence on the Mexican government for funding, government resources can be freed up for other projects such as increased investment in social programmes, education and small and medium enterprises (SME). Much of the social infrastructure which can be linked to Mexico’s enduring war on drugs will also benefit, as will the employment pool through the creation of more jobs.

The enhanced output of oil will improve Mexico’s disappointing GDP growth, which rather than rising to Peña Nieto’s optimistic figure of 3.5 percent in 2013, was an estimated 1.8 percent. Despite criticism from leftists and prominent politicians, without a drastic change to the oil sector Mexico will continue to fall further behind other oil-producing countries. Not only will the benefits of oil profits not be realised, the state will continue to suffer from a fatal drain on its resources.

The Mexican economy is in desperate need of a radical overhaul, which seems to be the reasoning behind Peña Nieto’s controversial bill. Despite a veil of doubt over the future of oil resources in Mexico, the step toward privatisation is in the best interest of the economy and makes Mexico’s oil ripe for investment.

About Author

Elizabeth Matsangou

Elizabeth works as International Account Manager for an environmental technologies company and has previously worked for a political consultancy company in Westminster and for Intelligence Squared, a forum for live debates. She received a BA in Philosophy, Politics and Economics from the University of Essex and an MSc in International Relations from the London School of Economics.