Protests have erupted in Mexico in response to rising gasoline prices, which many believe will lead to higher prices in general. This all comes at a time of growing fears over a possible recession in Mexico in 2017.
Rising gas prices come in the wake of sizable reforms to the petroleum industry in Mexico where, for decades, Petroleos Mexiocanos (Pemex) has enjoyed a monopoly on Petroleum extraction and the Mexican government has subsidized gasoline prices.
Pemex will continue to exist as a state-owned oil company, but the end of the Pemex monopoly comes at a time when the Mexican government is attempting to deal with fiscal pressures by inviting foreign investors to invest in the oil industry in Mexico. Those same fiscal pressures have also led the Mexican state to lower subsidies that have long existed to offset Mexican oil prices kept high by an inefficient and corrupt state monopoly on oil.
Unfortunately, these reforms also happen to come at a time when the global price of oil has has fallen sharply, meaning the once-hoped-for flood of oil investment into Mexico has been smaller than anticipated. It will likely pick up as oil prices rise, but in the meantime, ordinary Mexicans will have to deal with rising gasoline prices in the face of lower subsidies.
Blaming the Market for the Problems of Interventionism
As could have probably been predicted, however, these reforms — which are baby steps in the direction of a freer market — are being blamed for impoverishing the Mexican population.
Multiple news sources, for example, refer to the “neoliberal” reforms as the presumed cause of the current hardships in Mexico, by which they mean “market-oriented” reforms. In other words, the Mexican reforms are experiencing what we’ve seen time and time again in Latin America and elsewhere: economic crises are caused by decades of government monopolies and interventionism. But when the state must eventually turn to reform to avoid grave fiscal crises, it’s the reforms that get the blame.
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Writing for the PanAm Post, Rafael Ruiz Velasco notes:
Incredible as it may seem, even with all the empirical evidence of the results of high state intervention in economic matters, some people are daring to blame free market processes as the main cause of the upcoming price increases in gasoline, and Pemex’s eventual crash.
Pemex: A Relic of Economic Nationalism
The Mexican oil monopoly goes back to 1938 when Mexican President Lázaro Cárdenas nationalized the property of American and Anglo-Dutch oil companies. The move was motivated less by traditional Marxist ideology than by old-fashioned economic nationalism. Then, as now, support for the Mexican state’s oil monopoly is couched in terms of “oil sovereignty” or opposing the “oppression” of foreign oil companies. This ideology would later morph into what is today known as “dependency theory.”
The outcome of this monopoly, however, has been what is always to be expected from government monopolies: lower quality and higher prices. By cutting off Mexican oil exploration from foreign investment and foreign know-how, the Mexican state has only succeeding in making the Mexican oil industry less efficient, and less capable of taking advantage of the natural resources in Mexico.
As Ludwig von Mises observed in Human Action, many countries at various times simply do not contain within their borders the cutting-edge technology and knowledge necessary to take advantage of natural resources. Thus,
If the governments of these countries prevent aliens from exploiting these deposits, or if their conduct of public affairs is so arbitrary that no foreign investments are safe, serious harm is inflicted upon all those foreign peoples whose material well-being could be improved by a more adequate utilization of the deposits concerned. It does not matter whether the policies of these governments are the outcome of a general cultural backwardness or of the adoption of the now fashionable ideas of interventionism and economic nationalism. The result is the same in both cases.
Those of us who are related to and descended from productive middle-class Mexicans will have no trouble believing that modern Mexicans can take advantage of Mexico’s natural resources — if they are allowed access to global capital and global innovations. But, it is impossible to deny that by adopting a policy of expropriation, monopolization, and interventionism, the Mexican state has cut industrious Mexicans off from the very resources that would allow them to best take advantage of Mexico’s natural resources.
Unfortunately, the ideological problem of economic nationalism nevertheless continues with many Mexicans. Ruiz Velasco writes:
For decades, Pemex represented the triumph of the State over “the oligarchy and the evil yankee empire.” In Mexicans’ collective ideology, it became a bulwark of national sovereignty, and an apparently inexhaustible source of prosperity and wealth for the nation.
In reality, far from the whole nationalist and sentimentalist discourse, what Pemex has always represented is the imposition of the state on the citizen, of monopoly over competition, inefficiency over productivity, waste over financial responsibility and of trade unionism and clientelism over meritocracy.
The Pain of Reform
After almost 80 years of monopolistic control over the oil industry, Mexico now has a big mess to clean up. Equipment is outdated, and subsidies have been politically necessary to offset the inflated prices of an inefficient oil industry.
As one would expect of any monopoly industry, corruption in Pemex is rampant and executives and ordinary workers alike collect salaries to work at jobs that, in a free market, no one would be willing to pay for.
As is so often the case with government interventions such as these, many ordinary workers will be badly hurt as Pemex — now faced with actual competition — may be forced to cut jobs.
In fact, in many ways, Pemex may be facing a situation reminiscent of the coal-mine closings that occurred in Britain under Margaret Thatcher. While the coal mines of Britain were not monopolies in the same sense as Pemex has been, the heavily-subsidized — but highly inefficient — coal mines of Britain were similar to Pemex in that they are or were make-work schemes through which subsidies and monopoly powers allowed for the creation of jobs in un-competitive and un-economical areas.
Workers flocked to these jobs which were seen as offering job security and decent pay. Unfortunately for the workers, however, subsidized industries tend to eventually break up on the rocks of economic crises that force the end of the subsidies that made such high levels of employment possible. The end result is workers’ careers are ruined and costs increase for many consumers.
Unlike the British coal mines, however, Mexican petroleum could still prove to be competitive in a global marketplace — if foreign investment and competition is allowed to modernize the industry. If foreign investment pours in, it may be sufficient to save many petroleum-industry jobs. According to Bloomberg:
Pemex employs more than 145,000 people and accounts for around one-fifth of government revenue -- and is in it’s worst financial shape in history. It owes a record $7 billion to oil-service providers and faces historic levels of debt that will soon exceed $100 billion. Crude output has been slipping for 11 years.
But the potential is so great -- especially in the deep waters of the Gulf of Mexico -- that the Pena Nieto administration is confident the overhaul will be a success in the long run. The world’s oil giants have been eyeing Mexican reserves, estimated to be more than 13 billion barrels, for decades.
Many workers and consumers may suffer greatly in the meantime. It didn’t have to be this way, though. Mexico could have ended its oil monopoly decades ago, and today’s pain would be but a memory from the distant past. Better yet, the Mexican state could have refrained from ever nationalizing the oil industry at all, in which case no “modernization” or “adjustment” or “transition” would even be necessary. Unfortunately, that’s not what happened.
