Mexico’s Oil Referendum

Mexico is engaged in one of the most pivotal debates in its modern history: the future of its oil industry. The question is whether oil operations should remain in state hands or be privatized. Mexico exported 1.1 million barrels of oil per day to the United States in 2007, making it the third-largest supplier of oil to the United States, after Canada and Saudi Arabia. Yet the U.S. media has paid scant attention to the debate over what will happen with Mexico’s most important industry.

The oil crisis resulted from the deregulation of oil markets and increased speculation, prompting many countries, including Bolivia and Russia, to step up the regulation and nationalization of their oil industries. Yet Mexico’s ruling conservative National Action Party (PAN) is portraying the industry’s privatization as the only way forward.

Non-Binding Referendum

This push toward privatization has sparked an enormous and growing response. Nearly two million Mexicans participated in a public referendum organized by the governments of Mexico City and nine other states, giving a voice to the people in the most successful initiative of its kind in the country. Although not binding, the result has been substantial opposition to the proposed presidential bill for the privatization of the operations of Petróleos Mexicanos (PEMEX), the national oil company.

In Mexico City, a staggering 87% and 84% out of 826,000 people voted “No” to the following questions:

  • Presently, the production, transportation, storage and refining of oil resources are exclusive activities of the state. Do you agree or not that private companies can participate in these activities?
  • In general, do you agree or not that the initiatives being discussed in Congress on energy reform should be approved?

In the other nine states in which some 967,000 Mexicans participated, the results against the privatization were even more dramatic. Approximately 94.5% and 92.5%, respectively, answered “No” to those two questions.

This referendum is a product of the broad and growing citizen movement led by former presidential candidate Andres Manuel Lopez Obrador, and the political action of opposition parties grouped in the (FAP) coalition. It’s also a rejection of an initiative taken by President Felipe Calderon, who won a suspect electoral victory in 2006 and whose legitimacy is still questioned by many Mexicans. This movement has produced a plethora of debates around the future of the oil industry in which intellectuals, workers, members of Mexico’s Congress, politicians, students, and many others have stymied Calderon’s efforts to push the bill through without much discussion by lawmakers.

Constitutional Ban

The presidential initiative is not only illegal and unconstitutional, but would also harm the economy. As many intellectuals have argued, Calderon’s bill violates the Mexican constitution because an amendment is required to allow private investors, either national or foreign, to enter the oil industry. Investors would be allowed to build, operate, and own infrastructure, equipment, and pipelines for the exploration and development of oil and gas fields, the refining of oil and gas processing, and the transportation, storage, and distribution of basic petroleum and petrochemical products. In other words, the oil industry and the state-run oil monopoly PEMEX could end up in private hands.

Mexican sensitivity to this issue dates back to 1938, when President Lazaro Cardenas nationalized the oil industry and expropriated all operations in the country because U.S. and British oil companies refused to comply with labor laws and evaded taxes. Nationalization immediately became a symbol of national pride, and PEMEX is to this day an emblem of Mexican modern identity. Despite a lack of reinvestment of the company’s profits and the widespread corruption that has hurt PEMEX for decades, the industry remains the backbone of the national economy.

Mexico’s Neoliberal Era

Mexico’s neoliberal era began in 1982 when, after its debt crisis, international financial institutions forced the country to undergo structural reforms, including the massive privatization of state companies. At that time, and even after the North American Free Trade Agreement (NAFTA) was signed in 1994, the Mexican government couldn’t open the oil and gas industries to foreign investment due to constitutional constraints. In contrast to Canada, Mexico obtained an exemption under NAFTA to respect the Mexican constitution precepts on state ownership of oil.

PEMEX turned into the Mexican government’s piggy bank for public expenditure and was even tapped for financial “rescues” of failed and corrupt multi-billion-dollar privatization schemes, such as the Banking Fund for the Protection of Savings (FOBAPROA). Yet the deliberate attempts of successive neoliberal governments to weaken the state-owned company are well documented. Attacks against the company have included constant campaigns of discrediting it along with threats to the Mexican population of future energy shortages and higher prices for oil.

The main argument Calderon has used to justify PEMEX’s sale is that “it’s bankrupt,” since its liabilities in 2005 exceeded its assets by 3%. According to the government, it has reached its indebtedness peak and therefore it no longer has the capacity for further exploration to address the problem of declining production. The logic of Calderon’s administration is that only private capital can solve these problems.

Huge Profits

However, PEMEX generates huge profits while it pays an excessive and disproportionate tax bill. Between1998 and 2005, PEMEX generated a profit of $256 billion, while paying $284 billion in taxes; hence it recorded a $28 billion deficit. The taxation method applied to PEMEX (taxes as a percentage of profits) is four times larger than the norm for other private Mexican companies and three times higher than is applied to other oil companies elsewhere. In the first half of 2008 alone, PEMEX’s export revenue jumped to a stunning $25 billion, a 52% increase over the same period in 2007.

Calderon also argues that another reason to privatize –in his words to give PEMEX the ability to “contract with third parties for oil refining” – is that Mexico’s reserves will only last nine more years. However, in the debates it has become clear that, according to PEMEX, its reserves will last another 27.7 years. Calderon overlooks probable and possible reserves in the equation and in turn speaks of “prospective” reserves in deep waters that only private entities would have the capacity to explore, although there is no way to calculate the probability of their existence. According to mounting criticism, the urgency to for transnational oil companies to explore the deep waters of the Gulf of Mexico derives from the corrupt collusion of government officials and private interests.

Security and Prosperity Partnership

The public debates have helped to dispel the myths that underlie the privatization strategy for PEMEX. In sharp contrast, the secretive and corporate-led Security and Prosperity Partnership (SPP) – an alliance of the leaders of Canada, the United States, and Mexico, aimed at deepening NAFTA by continuing the economic deregulation agenda in a context of increased military security – remains a solid barrier against any public participation. One of the SPP’s core projects is the creation of an integrated “regional energy market” in order to guarantee the supply of oil to the market that uses it most – the United States. The SPP has proven to be a great help to oil companies for the grab of Mexico’s reserves.

Furthermore, the political party that governed Mexico for 70 years, the Institutional Revolution Party (PRI), is lending a hand to Calderon’s initiative. It has recently presented a reworded version of his initiative calling for the creation of “decentralized bodies of strategic interests” in which private contractors could participate, although the Mexican constitution prohibits such an arrangement. While no one questions the urgent need to reform and invest more in Mexico’s oil industry, there are alternatives to the model of private and depletive extraction.

Despite the positive and clarifying results of the debates, the challenge of defeating the privatization bill remains. The government has already disdained the consultation, treating it as a partisan strategy. Given that the PRI is also closing ranks with the PAN, the challenges of the social movement in defense of Mexico’s oil are even more formidable. However, the FAP coalition of the left–of-center parties that oppose the presidential bill has declared that it will work with the social movement and the intellectuals that have participated in the debates. A group of renowned Mexican intellectuals has come up with an alternative proposal that the FAP will present in Congress. It’s a call to:

  • Preserve the exclusivity of state ownership and management of the exploration, production, and refinement of oil and the manufacture of basic petrochemical products. Only this exclusivity, established in Mexico’s constitution, would allow oil profits to be used as a central driving force for Mexico’s economic and social development.
  • Ensure that the industry’s reforms guarantee that the oil supply for Mexico’s national consumption is protected. This proposal also calls for increasing oil conservation, reducing waste, protecting the environment, and cutting exports.
  • Make increasing the technological capacity of the oil industry a high priority, promoting research and development activities by means of joint projects by national research entities in coordination with the Mexican Petroleum Institute.

The debate over the future of Mexico’s oil industry will continue to be at the very center of the Mexican political and economic agenda for some time to come. When Mexican lawmakers reconvene next month, they will make a decision on the bill. Mexicans need to defend our national resources from the energy grab of transnational corporations. The future of Mexico’s oil independence is on the line.

Manuel Pérez-Rocha, a Foreign Policy In Focus contributor from Mexico, is an Associate Fellow at the Institute for Policy Studies in Washington, DC.