As a member of Congress, I once had a conversation with Mexican President Vincente Fox. I told him Mexico would never reach its potential as an economic powerhouse unless it could surmount two problems – corruption and government control of the economy exemplified by the state oil monopoly, PEMEX.
Last week, Mexico took a bold step to deal with one of those two problems, PEMEX. The head of PEMEX called it a “paradigm shift that should have happened decades ago.”
By overwhelming votes in both houses, Mexico’s parliament approved a constitutional amendment to allow foreign investment in Mexico’s oil industry. All oil exploration, production and distribution has been totally controlled by the state-owned monopoly. PEMEX has for 75 years been the prime example of socialist prohibition against foreign ownership of any Mexican land or manufacturing infrastructure.
The fact that it took a constitutional amendment to allow foreign investment speaks volumes about the stranglehold Marxist dogma has had on the nation’s economy. Ending the PEMEX monopoly is far from a complete repudiation of socialist doctrine, and there is a long way to go before Mexico has true competition in the petroleum industry. But this move is unmistakably a major break from the dogmas that grew out of the Mexican Revolution.
PEMEX, like state-owned enterprises everywhere, has been a major disappointment for decades, but Mexicans decided its failures can no longer be excused or tolerated. Despite the obvious importance of oil to the nation’s economy, which is the No. 1 source of government revenue, vast reserves of oil and oil shale remain undeveloped.
Not only has exploration and production lagged, refinery capacity has also failed to keep pace with demand. Incredible as it sounds, Mexico has been sending crude oil to Texas to be refined and then shipped back to Mexico for sale and distribution. The mounting failures in both exploration and production, which of course have led to a decline in government revenues, finally forced this radical reform in the direction of free markets.
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Oil also has enormous symbolic importance in Mexico today, similar to gold and silver in the 19thcentury. Foreign ownership has often been interpreted as foreign exploitation. Thus, state ownership of the means of production became a matter of both nationalist pride and a test of ideological purity. Opening up the oil industry to foreign investment signals a huge departure from a nationalist paranoia reinforced by Marxist ideology.
That attitude is changing, and that is very welcome development – for both Mexico and all of its trading partners, especially the United States.
But why now? I can think of a couple of reasons.
First, it strikes me as more than a coincidence that Mexico is making this move at a time when the U.S. economy has been struggling with high unemployment. Undoubtedly, many Mexican leaders have felt growing pressure to confront its economic problems and stop counting on the United States to be the eternal escape valve for Mexico’s galloping unemployment.
Very likely a second reason for the timing of this PEMEX “denationalization” is the example of the oil boom next door. The rapid expansion of oil and natural gas production in the United States is a wonder to behold. Naturally, seeing this, Mexicans began asking questions. “Why isn’t that happening here? We have enormous oil reserves internally and off shore in the Gulf. The potential for fantastic growth is there. Why is PEMEX stuck in the Dinosaur Age?”
There might also be a third reason for this development, one related to the ongoing battle with the drug cartels. The cartels are multi-billion dollar enterprises, and believe it or not, they do not just sit on their cash, they invest it – after laundering it through foreign entities. With this move, the Mexican government is allowing Mexican cartels to redirect those billions back to Mexican industries, not just Shell and Conoco and British Petroleum.
Well, for whatever reasons, PEMEX is being forced to change, and hopefully, the winds of change in Mexico will grow stronger as it sheds the blinders that come with dogmatic socialism.
The United States must not only welcome this break from socialism, we should do all we can to encourage more entrepreneurship and more “decoupling” of the Mexican economy from state bureaucracies. The more economic freedom Mexicans have, the faster their economy will grow and the more opportunities its citizens will enjoy.