Playing Monopoly in Mexico

By MARY ANASTASIA O'GRADY

Felipe Calderón won the July 2006 presidential election by convincing Mexicans he was the candidate who could bring about 21st-century living standards. A more robust economy was not just a Calderón campaign promise, it was the campaign promise.

To deliver, Mr. Calderón knew he would have to confront the nation's monster monopolies, which gorge themselves on privilege at consumer expense. The poster child of this practice is the state-owned oil giant, Pemex.

Americas Columnist Mary Anastasia O'Grady comments on why oil-rich Mexico can't maximize its oil production. (April 7)

Now, 16 months into Mr. Calderón's government, the effort toward even limited reform at Pemex is in serious trouble. To understand why, do as Deep Throat famously advised Bob Woodward and "follow the money." Despite the myths, the reason Pemex is considered a sacred cow has much less to do with nationalism than with who benefits from its monopoly power.

Over the past decade, Mexico has wisely diversified away from oil production as the principal source of national income. But oil remains an important source of financing for the government. In 2006, the petroleum contribution to the federal budget was $43.9 billion, or 37%.

That income stream is in no way guaranteed in perpetuity. At the end of last month, Mr. Calderón's government released a 130-page study that found existing wells are drying up faster than new ones are coming on stream. Bottom line: Pemex production, as Energy Minister Georgina Kessel put it, has "fallen constantly" in the past three years. It's not that the oil is not there any longer. Reserves are plentiful. But they are not being exploited. As a result, she said, Mexico has "left on the table income of around $10 billion annually, almost three times the annual budget of 'oportunidades' [the government's social program targeting the poor], the principal tool in combating poverty."

In December 2006, daily output dropped below three million barrels per day for the first time since 2001, and it is expected to continue to shrink. By 2012 the minister says that production is forecast to drop by 800,000 barrels a day at its principal wells. By 2018 daily output will be down 1.5 million barrels.

THE AMERICAS IN THE NEWS

Get the latest information in Spanish from The Wall Street Journal's Americas page.

This dismal performance means that, as a global competitor, Pemex is losing out. The company is now the 11th-largest oil company in the world, having fallen from the No. 6 spot in 2004. "While other countries are enriching themselves through deep-water oil wells, our country simply wastes the opportunity and runs the risk of losing it," Ms. Kessel said.

Pemex is also incapable of serving the local market. "Today, four out of every 10 liters of gasoline consumed in the country are imported," Ms. Kessel said. At a Mexico-Norway energy conference last year, the Energy Ministry reported that gasoline demand is expected to grow annually by 3.9% over the next 10 years. Without new refinery capacity, Mexico will need to import 415,000 barrels a day by 2015. This is not good news for Americans facing rising prices. U.S. refining capacity is already overtaxed. The ministry says petrochemical imports are also expected to grow rapidly because the Mexican industry has "a disintegrated production chain, high production costs, low competitiveness and low levels of investment."

How to reverse this and turn Mexico into the booming oil country that it should be? That's easy: Allow private-property rights. Wildcatters would turn the country into a gusher of black gold. Mexican wealth would shoot up.

Such heresies cannot even be whispered in Mexico – though not because the Mexican people can't be convinced that there is a better way to run things. The reason is because the guardians of the status quo – politicians, suppliers and labor – would suffer if competition hit the market. Private Mexican contractors who "supply" Pemex are used to business transactions tied to political connections. If there were multiple buyers in competition with one another, those political profit margins would evaporate. Private-sector oil companies vying for returns would care about how much suppliers were charging. Competition would reduce the incentives for graft, and payrolls would have to be justified so the labor union would also lose power. The last special interest to want any of this change is Congress, where many members act as middlemen between Pemex and the contractor. As a famous member of the Institutional Revolutionary Party (PRI) once explained it: "A politician who is poor is a poor politician."

Still, without new investment Mexico will bid good-bye to its legacy as a world-class oil producer, and to the income that accompanies that status. So the government is looking for a way to allow the private sector into the oil industry without relinquishing the monopoly. As the Energy Ministry's report noted, all national petroleum companies now collaborate with third parties as a way to boost competitiveness.

Three months ago, congressional support for changes that would have allowed private-sector investment in distribution, refining and deep water exploration seemed within reach, because the PRI appeared ready to side with Mr. Calderón and his PAN party. Then it emerged that Mr. Calderón's interior minister signed Pemex contracts for his family business while working at the Energy Ministry. The interior minister says he did nothing wrong. But PRI leadership now says it will not support reform. What it really means is that now it has leverage to demand some new power in return for helping the Calderón government, caught in a scandal, to achieve a political victory.

Ironically, if the PRI blocks reform, it will preserve the very practices it now feigns outrage about. Considering the party's long history of corruption, it is difficult to see its objections as anything more than contract envy.

Meanwhile, Mr. Calderón warned last week that time is running short and the government must act "before it's too late." On the other hand, if the PRI wants to run Pemex into the ground, maybe Mr. Calderón should stand back and let it happen. It may be the only way to starve the most voracious of Mexican dinosaurs.