Oil In Mexico - A Nation In A State?
A Fleet Street Letter Special Report
By Michael Orme
Mexico as a nation-state is under threat, and with it the US’s third largest source of oil. Indeed, by some definitions, Mexico is no longer a functioning nation-state.
The Federal government does not have the forces to smoke out, let alone counter the drug barons who virtually control such provinces as Sinaloa, Nuevo Leon and Sonora. Nor can they tackle the rebels and privateers who have been disrupting the country’s oil infrastructure. There has been a mass exodus from the police and the army in the wake of the assassinations of hundreds of public officials.
Moreover, Mexico as a state lacks diverse and predictable sources of tax revenues. It is reckoned that over 70% of Mexican businesses and individuals cheat the system, leaving the government to rely heavily on the State-owned oil company, PEMEX to act as a de facto tax collector. These PEMEX activities account for 40% of government revenues.
And therein lies an increasingly serious problem.
Oil in Mexico: The end of the oil
The vast Cantarell oilfield, the world’s second largest, is running dry. In the last two years daily output has halved to just over one million barrels a day. Worse, this figure is forecast to decline by a further 80% by 2020.
Over the next dozen years or so Mexico’s overall oil output is projected to fall by at least 30%. In this period, Mexican domestic demand is likely to increase by at least 10%.
The disparity is alarming. The only saviour could be a miraculous production increase in the Chincopec and Ku- Maloob-Zaap fields.
This summer, in a little noted release, PEMEX said it would be ‘out of oil’ in seven years — not short of oil but ‘out of it’, So who or what will then provide a weak and fractured government with its main source of revenues?
As if the accelerating depletion of Mexican oil wasn’t serious enough, it is the ‘above-ground’ factors that are worrying Washington more and more.
This year has seen a string of rebel attacks on oil infrastructure, including the Queretaro pipeline.
These attacks led to shutdowns at ‘just-in-time’ production facilities owned by major multinationals such as Honda, Kellogg’s, Hershey’s and Nissan. The effects of these shutdowns rippled through logistics chains with significant economic impact.
The fear is that the rebels’ own evaluations of their success in targeting oil infrastructure will encourage them to launch further attacks on the system.
It has been well noted by Mexico’s political rebels and criminal class how successful the Movement for the Emancipation of the Nigerian Delta (MEND) in Nigeria has been. The guerillas have been disrupting Nigerian oil supplies, and privateers have been extorting cash by kidnapping key people, especially foreigners, from the oilfields.
Oil in Mexico: A country in turmoil
Mexico, which sports half of Latin America’s billionaires, including cell phone tycoon Carlos Slim, now the world’s richest man, is now an incendiary mix of wealth, black markets, criminals, emigrants, and oil and gas reserves, over which a Federal government is singly failing to preside.
It is said that the country has two main ‘safety valves’— oil and emigration.
The oil ‘valve’ seems less ‘safe’ by the day as both below and above-ground factors turn sour.
The gap between rich and poor in the country — now compounded by the recent ‘tortilla turmoil’, resulting from the impact of the US corn-based ethanol policy on grain prices — is only set to widen.
The Federal government failed to handle the matter competently, and there were widespread riots. Adding to the problem, the government is so short of funds that it is unable to provide the social welfare needed to stave off serious civil unrest. This further fuels the rebel cause and gives more power to the drug barons.
The inevitable result? The government opens the other ‘safety valve’ — yet more emigration north of the border.
Oil in Mexico: Exodus of the labour force
There are already at least 20 million Mexicans in the US. Émigrés are already causing major demographic and power shifts in the southern part of the US. It was well noted that California recently vetoed a US Federal Government move to double National Guard patrols at the border.
But more Mexicans in the US means more remittances to Mexico. Remittances are estimated at more than $20bn a year, and there have been attempts by the Mexican government to use them to ease its fiscal problems. In particular towns and villages, they are offering to match remittances with public funds to provide essential public works. So far these initiatives have not cut it. Before long, remittances will overtake oil as Mexico’s principal revenue source.
The bottom line: Mexico will become even more unstable and its oil sector more depleted and undermined as more and more Mexicans will stream across the border to the US. Hugo Chavez to the south will rub his hands with glee as Mexico’s turmoil adds to the oil ‘risk premium’, enhancing his own geopolitical clout. In one way or another, all this adds to the US’s problems.
Michael Orme is a financial journalist, former stockbroker and associate for an institutional investment advisory firm.
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First published on November 10th 2007
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