NCPA - National Center for Policy Analysis


October 17, 2008

The word is out: Mexico's days as a major oil producer are numbered.  Oil output has plummeted -- down nearly 20 percent in the last three years -- with no end in sight.  Exports will likely disappear within the next decade, which is bad news for the United States since we depend on Mexico for one-eighth of our oil imports, says Forbes Magazine.

However, Mexico does not lack oil or gas; it's just that Pemex, Mexico's state oil company, is rife with corruption and gross inefficiencies.  And it has long been a haven for political patronage.  President Felipe Calderón has tried to shake up this bloated behemoth by permitting the creation of private refineries and pipelines, but Mexico's Congress has blocked even these small reforms, says Forbes.

In fact, the idea of allowing foreign oil companies to drill offshore raises nationalist hackles.  But President Calderón should consider a push for the creation of mineral property rights, says Forbes:

  • In the United States, for example, if oil is discovered in your back yard, you'll get rich through royalties.
  • But in Mexico Pemex will come in and take your oil away; this doesn't create much incentive for private exploration.
  • Basic mineral property rights don't need to be extended to foreigners; just permitting them for nationals would do the trick.
  • Private companies would soon crop up, and Pemex's monopoly would gradually be eroded.

Even though the old guard would fiercely resist such a reform, the Mexican people know Pemex has deep problems.  As long as the oil remains in Mexican hands, voters might cotton to the idea.  The world, like Mexico, is not suffering from a genuine oil shortage but from self-inflicted constraints such as the lack of property rights, says Forbes.

Source: Editorial, "Dry Hole of Statism" Forbes Magazine, October 13, 2008.

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