2007 November 17 Saturday
Will Oil Production Decline Bankrupt Mexican Government?

Michael Orme sees Mexico as falling apart.

Mexico as a nation-state is under threat, and with it the US's third largest source of oil. 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. Indeed, by some definitions, Mexico is no longer a functioning nation state.

I do not know the extent to which drug barons control areas of Mexico. I tend to be skeptical of more severe versions of such claims in large part because drug barons do not need extensive control. They just need enough power to get law enforcement agencies to leave them alone. Does that require a degree of control that causes everything else to malfunction? Or does Mexico malfunction for other reasons such as a low skilled workforce, a lack of a civic culture, and other factors?

However, Orme points to another reason to expect worsening conditions in Mexico that strikes me as more plausible. Mexico's government relies very heavily on the national oil company Pemex for tax revenue.

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.

Mexico's oil production is going to continue to decline. Though some of the revenue loss is probably being offset by higher oil prices. The tax revenue of Mexico rises with oil prices. That article mentions the Mexican legislature has just granted a tax cut to Pemex, the Mexican national oil company. But Vicente Fox vetoed that bill. Why? Probably because he thinks the national government can't get by without that Pemex tax revenue Yet Pemex needs to retain more money to develop oil fields in order to slow and delay production declines.

So why is the company starved for cash? Its proven reserves are dwindling, and last year fell 7.7 percent. Its main oil field, Cantarell, is about to reach its peak production and will begin to decline next year. Without big investment and new oil discoveries soon, Pemex's total production, now hovering above 3.3 million barrels a day, could begin to decline by the end of the decade, analysts say.

Despite lofty prices for oil, Pemex has seen little of the roughly $9 billion windfall above its expected revenue. It is heavily taxed - the government relies on it to finance about one-third of the national budget.

And events this month have shown an uneven will to give Pemex the means to find and pump new oil. President Vicente Fox, a long-time supporter of legislation to lower the heavy taxes Pemex pays, surprised the country by vetoing a bill that would have allowed Pemex to pay $2.4 billion less next year.

Think about what that portends for the future. Mexico's government is going to continue its dependence on Pemex revenue even while it starves Pemex. Eventually the money going from Pemex is going to start declining. Mexico will enter a severe financial crisis. In theory it can raise the tax revenue elsewhere. But it will need to enact types of taxes that the affluent can't escape via bribery. Can Mexico's political system manage to do this?

Cantarell's long term outlook is a massive decline. Just in 2007 Canterell production will decline 15%.

Production at the field is down 130,000 barrels a day from January, within Pemex's forecast that yields will decline around 15 percent this year.

The Organization for Economic Cooperation and Development (OECD) Latin American Economic Outlook 2008 report draws attention to low Mexican tax revenue and low quality of spending of that revenue.

The OECD urges Brazil and Mexico to improve the efficiency of public spending. Both Brazil, which collects tax revenues equivalent to around 35% of its GDP, and Mexico, where tax revenues amount to only 15% of GDP, score badly in such areas as access to basic services like clean water and electricity.

The corruption that keeps down Mexican tax collections starves funding for Mexican schools. The average of 9th grade education in Mexico probably keeps Mexico's economy below where it could be. Though Mexico can't hope to rise to US living standards given a national average IQ of 87. As of 1999 Mexico spent only about 3% of GDP on education and compulsory education was raised to 9th grade from 6th grade only in 1993! Mexico's human capital development is severely lagging.

Given the problems in Mexico (corruption, massive organized crime groups, private militias, poverty, population growth) we need to build a non-pathetic border barrier fence along the US border with Mexico. Yes, we really can isolate ourselves from some of the world's problems and should make the effort to do so.

Share |      By Randall Parker at 2007 November 17 11:43 AM  Mexico

Wolf-Dog said at November 17, 2007 12:33 PM:

When the oil production in Mexico declines, there will be even more pressure on the Mexican government to send their unemployed citizens into the United States in order to avoid political unrest. And some government officials in the United States might also be forced to be lenient to Mexican immigrants in order to prevent Mexico from joining the new anti-American axis, but this will be a difficult decision at that time, and further immigration will almost certainly be banned. This has strategic and military implications. As Mexico becomes more impoverished, if the U.S. economy becomes unable to support the Mexican immigrants and if there are new laws that make it difficult to immigrate into the U.S., then there will almost certainly be more anti-Americanism in Mexico (and probably in most of South America.) The question is what will happen if Mexico becomes anti-American like Venezuela and joins the Iranian anti-American axis? This scenario sounds possible and the United States will perhaps get encircled.

HellKaiserRyo said at November 17, 2007 4:26 PM:

I think it is politically incorrect to openly support a border fence. However, I will say this: some people will oppose a border fence because of "compassion" but as a utilitarian "compassion" is not necessarily a virtue. I see it rather perversely; it is a zero-sum game (or perhaps negative sum game). Of course, in zero-sum games, utilitarianism does not have any pragmatic value at all. I am convinced by Steve Sailer's argument that immigration causes unemployment and a lower standard of living of America's working poor. Some will say he is politically incorrect for invoking racial IQ to fortify this argument. "Compassion" can be rather inimical in this sense.

Ned said at November 18, 2007 2:35 PM:

Mexico has a long, turbulent history of wars, revolutions, assassinations, coups and massacres. For example, prominent political leaders Madero, Carranza and Obregon were all murdered. The relative stability that Mexico has enjoyed recently is in sharp contrast with the situation of, say, a century ago. As recently as 1994, the Mexican economy collapsed and was rescued by Bill Clinton's bailout. Some say that Mexico is like a volcano and that the next eruption is long overdue.

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