Mexico’s Theology of Oil/Enrique Krauze

Mexico’s Theology of Oil/Enrique Krauze is a historian, the director of the literary magazine Letras Libres and the author of Redeemers: Ideas and Power in Latin America. This article was translated by Hank Heifetz from the Spanish.

The New York Times |01/11/2013

In almost every country, the availability and exploitation of oil are essentially economic issues — every country, that is, except Mexico, where it is a matter of secular theology. For many Mexicans, the question of whether to open the national oil industry to private investment is much more than a practical decision: It is an existential dilemma, as if permitting foreign investment were to bargain away the country’s soul.

Over the next few weeks, the Mexican Congress is likely to become a kind of theological council to discuss the so-called Energy Reform proposal put forward by President Enrique Peña Nieto. The measure would modify Articles 27 and 28 of the Constitution and allow contracts between the Mexican government and private companies to share profits from the extraction of oil and gas throughout the country as well as deep-water sites in the Gulf of Mexico. It would also open the door to free competition along the whole chain of the industry: refining, transport, storage, distribution and basic petrochemicals.

The historical significance of this proposal cannot be understated. In 1938, the Mexican oil industry was nationalized, and in 1960, a constitutional change assigned full control of the industry to Pemex, a state monopoly.

The Energy Reform will require a two-thirds majority that can be achieved through the representatives of the PRI (the party that ruled Mexico from 1929 to 2000 and was voted back into power in 2012), the PAN (a center-right party, which would prefer even greater liberalization of the industry) and a few small parties. Representatives of the PRD (a party of the moderate left) will likely vote against the reform.

The main opposition will not emerge from the chambers of Congress, but rather from the streets, where protests promise to become massive and angry. The opposition has a charismatic leader: Andrés Manuel López Obrador. Defeated in the last two presidential elections, he is positioning himself for a third run, in 2018. There can be no stronger platform than adamant resistance to a reform that he and millions of his followers regard as “a betrayal of the nation.” In a recent speech, he compared the possible passage of the Energy Reform to the loss of Texas in 1836 and Peña Nieto to Santa Anna, the general who lost the Mexican War and is remembered in history books as a “traitor.”

But the economic arguments for such a rejection are weak. The opposition says that Pemex can, by itself, successfully explore the Gulf of Mexico and exploit shale deposits if the government grants it the financial autonomy to increase its investment. But the government commitment to oil exploration has risen sixfold in the last 10 years (to $25 billion, from $4 billion), without major results. The United States may be on the path to energy self-sufficiency, thanks to oil wells drilled each year in the Gulf (about 150) and about 10,000 new wells a year for shale oil and gas. Pemex drills only about five oil wells per year in deep water and plans only 140 wells per year for shale gas. And Mexico has to import large quantities of gas and gasoline.

How, then, can the fierce opposition to contracts with private companies — which would halt the decline in production, modernize the industry, create jobs, substantially increase oil profits for the Mexican state and foster much needed economic growth — be explained? Why can’t Mexico, like Brazil or Norway, develop its publicly owned oil company into an enterprise that can successfully benefit from association or competition with private companies?

The first reason is the controversial record of privatization in Mexico. When Carlos Salinas de Gortari, president from 1988 to 1994, transferred ownership of banks, television and telephone companies from the state to private hands, the general view was that he had favored his friends, with lucrative results for the new owners but not for the consumer. Yet the Energy Reform is not an act of privatization. Contrary to the opposition’s rhetoric, no property will be transferred to the companies involved.

A second explanation — deeper and more complex — is the weight of nationalism. The Constitution of 1917, the product of a social revolution that began in 1910, was a foundational document for the new Mexico. Its most emblematic article was the 27th, which assigned ownership of aboveground and underground resources, formerly the property of the Spanish crown, to the nation. For two decades, British, Dutch and American oil companies refused to accept Article 27 and operated as extraterritorial enclaves, manipulating their books and evading taxes. Then, on March 18, 1938, after a labor dispute, President Lázaro Cárdenas nationalized the industry. The popular reaction was spontaneous. To pay the debts incurred by the expropriation of the foreign companies, rich women contributed their earrings and poor people their chickens.

From then on, textbooks, monuments and annual ceremonies celebrate Cárdenas’s actions as a restoration of national honor. In a number of ways, it was. And so, understandably, to many Mexicans — including Cuauhtémoc Cárdenas, Lázaro’s son and the respected leader of the moderate left — today’s Energy Reform appears to be a sin against history.

But a third issue, little discussed by the opposition, seems the most compelling: the fear that increased oil revenue will simply raise the level of corruption to the point reached during Mexico’s last oil boom, which began in the late 1970s and led to a traumatic experience for the Mexican people. Mishandling the new abundance and elevated world prices, the PRI government created a vast bureaucracy that embarked on wasteful projects, contracted gigantic international debts and eventually bankrupted the country, leading to the disastrous devaluation of the peso in 1982.

Given the past performance of Mexican governments, it is legitimate to be skeptical. The opposition could do a great deal of good by focusing on practical steps to avoid another economic fiasco: maintaining tight vigilance over contracts, ensuring the productivity and transparence of new investments, creating a fund for future development (as in Norway), monitoring potential ecological damage, restructuring and modernizing Pemex, and, most important, assuring that profits are not used to expand bureaucracy but are delivered to the Mexican people.

With the opposition still completely opposed to the Energy Reform, the only way the government can win this battle is not through a theological debate about the Mexican soul, but by convincing ordinary Mexicans that the reform can deliver tangible results, that this time it will be different and the newly generated wealth will reach the hands of its presumed owners: the Mexican people, especially the tens of millions among them most in need.