Friday, May 02, 2008

Mexico: How Oil Nationalization helped ruin a country

How can it be, you may ask, that countries awash in oil STILL remain impoverished?

Simple: They go socialist, nationalize the oil industry, never modernize, and turn the industry into a cesspool of graft and corruption.

And unfortunately, the duped populace thinks this is actually normal:

Mexican schoolchildren have been taught for generations that March 18 is a very special day. It is special, they are told each year on March 18, because it was on that date in 1938 that the Mexican president triumphed over evil foreign oil companies and expropriated all their land, equipment and interests. The result of the expropriations was a national government-run petroleum company, Petróleos Mexicanos (abbreviated as PEMEX) and the prohibition against any private company profiting from natural resources.

Now, 70 years later, the country is facing a political and economic crisis that appears unsolvable. PEMEX is failing and the revenue the government depends on from PEMEX for 40 percent of the national budget is shrinking. For 70 years, the Mexican Government squeezed the wealth out of PEMEX by over-drilling existing wells while failing to reinvest adequately those profits in new technologies or exploration. As record high crude oil prices are producing record profits for most oil producing countries, Mexico’s revenue from oil is quickly disappearing.

Mexico’s national government is continuing to strip PEMEX each year of its resources, which is slowly killing the company. Absent billions of dollars in new investments in the company’s failing infrastructure (some of which dates back to the 1930s), it will likely be unable to recover from its current decline. The profits from the oil exported from Mexico have been essential in propping up the government for years. So a decline in those profits also means more instability in Mexico.

Recognizing the obvious, Mexican President Felipe Calderón has attempted to right the wrong with recent measures to allow private foreign firms to assist PEMEX in exploring and tapping new sources of oil in Mexico in exchange for a percentage of future profits. Reaction from the opposition and public is telling.

Generations of Mexican children who learned foreign and private oil companies are evil later became members of Congress who are reacting to the initiative as if it were treason. The leftist members of the legislature opposed to Calderón’s initiative on PEMEX were so angry they shut down the Mexican Congress for two weeks. The doors were padlocked as they refused to consider giving up their “constitutional right” to all the profits of PEMEX. The President of India was forced to cancel a speech to the Mexican Congress last month given the unstable security situation in the capital as thousands marched in the streets.

But boo hoo hoo, cry the leftists. How can we insure the national wealth gets down to the poor?

Simple: Do what Alaska did, and what Iraq is doing now. Establish a "permanent fund" from taxes on oil companies, and pay the poor dividend checks out of that fund.But nationalization is a farce.

The fundamental truth is that PEMEX, the goose that lays the golden eggs, needs to be fed. American and European companies have the capital to invest in new equipment and drilling for PEMEX, but will not do so until they have some guarantee their investment can be rewarded by future profits. Calderón has backed away from his initial proposal involving a percentage fee from new discoveries and is now talking about providing foreign companies a fixed fee instead. This isn’t likely to succeed since there will be no incentive for the companies to increase their return if they find more oil. Much of the oil left in Mexico is believed to be thousands of feet below the Gulf of Mexico and PEMEX has neither the money nor expertise to access those immense oil fields.

Maybe March 18 should be changed to “Aesop’s Fables Day” so future generations of Mexican children can learn common sense that the current public discourse is lacking. If you kill the goose that lays the golden eggs, you will have nothing. Mexico has the oil reserves today to be a very wealthy nation if it could only abandon its xenophobic and socialist public policies.
Mexico’s current self-imposed crisis was accurately described by President Calderón simply as “embarrassing.”

Even President Calderon gets it, but the leftist dupes do not. Typical.

Sort of Related: Vanderleun at American Digest has a solution to the corruption of Mexico.

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