Thursday, January 12, 2017

The Mess in Mexico

I only clued into the mess in Mexico a few days ago as the news media began reporting riots over gas price increases there. So what is going on?

I checked with Stratfor. It's simple. The Mexican government reformed its oil sector in 2013, in response to poor results at Pemex, its nationalized oil company, and declining oil production. There are "upstream" reforms that allow private-sector companies to participate in exploration and production. And there are "downstream" reforms, including the raising of gas prices that were fixed below market.

The Mexican people absolutely hate the gas price increases. I suppose that it doesn't help that the Mexican peso has been in decline. It's trading at about 22 pesos to the dollar, down from 13 pesos back in 2014.

Here are a few facts about Pemex, PetrĂ³leos Mexicanos, from La Wik.

  • Pemex was formed in 1938 from the nationalization and expropriation of private (and foreign) oil companies
  • Pemex supplies about a third of Mexican government revenues
  • Pemex has huge unions, including the professional and engineering staff
  • Pemex is corrupt
  • The left absolutely hates the 2013 Pemex reforms
So you can see that the Pemex troubles in Mexico are not unrelated to the meltdown in Venezuela, except that the Mexican ruling has have not tried to milk the national oil company for revenues in quite the foolish way of the Venezuelan Bolivarian lefties.

Of course I don't know the political reasons for the 2013 reform but I expect that the Mexican ruling class was disappointed that, with the oil price sky high, they weren't getting the revenue they could have had if the oil output had been increasing rather than decreasing. The oil price was at $100 per barrel in 2013 and didn't start its fracked decline down to $30 until mid 2014. Obviously it was assumed, in 2013, that the government could pay for the reforms with the plentiful revenue that gushed out at $100 per barrel.

Now people are saying that the oil price protests will feed into the 2018 Mexican presidential elections and maybe elect a lefty candidate.

All I can say is that President Trump had better build that wall, because I'd say that Mexico will be having economic problems in the next few years, and that will mean more people trying to cross the borders to get at US jobs.

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