Mexican Oil Goes from Public to Private

We arrived in Charm City late last night, after a lengthy layover in Houston. To say the air here is fresh, or crisp, would be an understatement. It’s colder than a central banker’s heart. Well, that may be a slight exaggeration. A fierce wind lashes off the Inner Harbor. Steam pours from the manholes lining the streets and billows into the night sky. The few brave – or destitute – souls who venture outside are bundled up in their winter woolies. It’s a far cry from the balmy, Pacific Coast weather we’d been enjoying in Mexico of late. Speaking of our southern neighbor, here’s a headline for you, Fellow Reckoner:

“In Major Shift, Mexico Allows Oil Drilling by Outsiders,” says one of the newswires.

What’s this? Has the Mexican government been thumbing through the virtual pages of our “fringy,” “doom and gloom” publication? Earlier this week, as you may recall, we wrote an entire article (“The Gross Mismanagement of Mexico’s Oil Industry”) outlining how needless pressure from Mexico’s bureaucracy has, over the years, inhibited the full development of the nation’s vast oil reserves.

“With heaven and earth conspiring to deliver such a bounty to the Mexican people,” we wrote of the geologically freakish Cantarell Field deposit, “one is tempted, perhaps beyond better judgment, to ask: What could possibly go wrong? Enter Pemex, the nation’s state-owned petroleum company. Again, it seems there is no privilege so vast as to render it beyond the destruction of the ‘people’s’ government.”

Mexico’s crude production, under the “stewardship” of the state-owned Pemex, has traversed a steep, seemingly inexorable decline for the better part of the past decade.

“Despite annual revenues in excess of $75 billion dollars, Pemex is only able to survive today through its immense borrowing,” we wrote. “Pemex pays out over 60% of its revenues in taxes and royalties. Those receipts, in turn, account for around 40% of the federal government’s entire budget. As such, the state-owned dinosaur is now over $40 billion in the hole (so to speak) and, to make matters worse, is facing inexorable production decline in many of its fields, including that giant asteroid baby, Cantarell.”

All this amounts to falling revenue for the Mexican government and, as a side non-benefit, imperiled US energy security. (The US is the Central American nation’s largest customer – declining production there translates to more pressure on the US to “fill the tank” from other, relatively unfriendly nations abroad.)

But that all changed on Tuesday, when Mexico’s supreme court decided to invite private companies – both domestic and foreign – into the marketplace for the first time in 70 years. Juan Jose Suarez Coppel, the CEO of Pemex, said he hopes the liberalization of the sector will help Mexico work toward production of 3 million barrels per day within ten years. There’s plenty of room to go wrong, of course, but this seems like an uncharacteristically rational step in the right direction by the Mexican government. We’ll see where the chips fall in due time.

Alas, where the tide of state strangulation recedes from one shore, it rises to wash away whole villages on another. Back here in the United States of ’merica, we see evidence of government involvement all around us. There are rules and laws against all sorts of things, all, we suppose, designed to help protect us from our infant-minded selves. “No loitering”… “No running”… “No standing on one’s head.”

And nowhere is the feeling of Big Brother more oppressive than in the sphere of economics. It’s a government-sponsored recovery, we are told (though we hear little mention of the government-sponsored recession that preceded it…nor the government-sponsored depression that will likely follow).

For the most part, the media tends to view Obama/Bernanke policy like it’s handed down from Mount Sinai: “Thou shall have thy cake and thou shall eat thy cake,” seems to be the general gist of the story. More tax cuts…and more benefits. More spending…more credit for crooks…more deals and handshakes for deviants and shysters.

As far as we can tell, all this circus activity is doing little to inspire confidence in the markets. Yesterday, last we checked, major indexes were neither up enough to raise an eyebrow nor down enough to raise a smile. Gold, however, had taken a $30 nosedive by lunchtime…enough to remind us not to check the daily charts so…uh…daily. The precious metal, a very natural bet against the world’s very unnatural fiat money, is in a decade-long bull market. A $30 single day move may be sufficient to entice some traders to take profits, but it’s probably not enough to entice most investors to sell. And, with central bankers at the pump from the Potomac to the Thames to the Rhine and beyond, that’s not likely to end any time soon.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning