MEXICO CITY — Mexico is in danger. Not because of the pandemic or the lockdown-induced economic collapse. And not even because of the challenges of migration, poverty and inequality. These, of course, are all significant issues, but it’s one problem in particular — a self-inflicted one — that poses a greater danger: the government’s dependence on oil. 

The story begins in 1938, when Mexico became the first country in the world to nationalize its oil industry, expropriating the holdings of major British, American and Dutch oil companies. Yet Mexico did not export oil until 1976. Then, in 1982, Mexico declared its need to use oil to finance government expenses. The country’s passion for oil, coupled with its narrative on independence and nationalism, evolved into a means to achieve greatness. 

After more than 40 years, political leaders are still fixated on using oil to turn Mexico into a developed country. This dependence is so strong that President Andres Manuel Lopez Obrador and his supporters believe that oil will help Mexico escape social and economic backwardness. If oil can be considered one of Mexico’s original sins, then, as often happens, the consequences can be bitter.

Why is oil so addictive? Mexico’s major trading partners have plenty of it. In fact, the United States recently became the world’s No. 1 producer and exporter. Canada also has huge reserves, and the province of Alberta is well known for its abundance of hydrocarbons. Oil is managed in the United States and Canada in ways radically different from Mexico. Oil “belongs” to states and provinces in the United States and Canada, and can be exploited by numerous private firms. In Mexico, it is the exclusive property of the federal government, with state and local governments left to the wayside. The Mexican federal government, led by the president, controls oil throughout Mexico through one single company: Petroleos Mexicanos, or Pemex.

Oil produces dependency, as seen throughout the Middle East and North Africa, specifically among governments and the political elite, as it is a way to bypass taxes and other forms of income that could entail greater accountability and transparency. Politicians, entrepreneurs and the general public only serve to reinforce this dependency. As is the case with alcohol or tobacco, and many other addictive substances, availability is crucial. Though oil is abundant in Mexico, prices and production have recently collapsed. Consumption does not cause dependency, but enormous financial returns do. Since 2014, and especially  following the COVID-19 pandemic, global demand for oil and all fossil fuels has substantially declined. In theory, at least, this would be an opportunity for oil-dependent countries to consider breaking this dependency and pursuing a more sustainable path, both in terms of the environment and the economy. Not in Mexico.

Former President Enrique Pena Nieto pushed in 2014 to allow the private sector to participate in oil exploration, production and exports. Yet President Obrador is trying to reverse this move. Both ends of the political spectrum share the belief that oil is good for business, the government and the Mexican people, even though oil revenues have decreased since 2012 from around 40% of government revenues to around 8% currently. (See chart below.)

Should it be possible for a public company to endanger the political, economic and social prospects of an entire nation? Mexico has approximately 130 million people, with a gross domestic product (GDP) ranking 15th in the world in 2018, according to the World Bank. Data from the Observatory of Economic Complexity shows that Mexico’s exports are the 11th largest in the world, and its economy is the 21st most complex globally, using such imports and exports as a measure.  

How can such a country be imperiled by a single public company? Pemex is a fallen angel whose liabilities — meaning the total size of its short- and long-term debt, net worth, revenues, operating costs and payroll expenses, fiscal transfers and pensions — represent approximately 15% of Mexico’s GDP (see Pineda & Musacchio). It ranks seventh, compared to other countries with similar liabilities, and of those countries, it is the only one that has negative total equity in the world, meaning that it has a negative present value.

Liabilities as a proportion of the federal government’s budget is close to 70%. According to April 2020 figures from Mexico’s Public Treasury, Pemex nearly has the same external debt in dollars of Mexico’s federal, state and local governments combined (around $100 billion). No other country in the world has a single public enterprise with an external debt higher than that of the whole government. 

Pemex is too big to fail and too big to bail out. Perhaps tax deductions, government transfers and the obstruction of private companies can buy time for both Mexicans and their government, if only for a little while. But in the coming months, Mexico’s oil dependency will diminish resources in important sectors such as health, public security and education. Mexico will continue to promote the idea that, to create sustainable economic growth and employment, it is better to invest in oil than people. This is a path toward disaster, but the outcome could hold the potential for Mexico to turn into a global market based on a true democratic polity, with a political system based on taxes and accountability: a genuine republic. It could also, alternately, open a path to a rentier state, combining unregulated markets with a parasitic, corrupt and inefficient political and bureaucratic elite. 

1 SOCAR (Aze), PDVSA (Ven), Sonangol (Ago), Equinor (Nor) and Staatsolie (Sur). See The National Oil Company Database, Natural Resource Governance Institute, April 2019. A recent publication by the IDB reports Pemex represented 14.63% of Mexico’s GDP liabilities between 2010-2016. See Aldo Musacchio and Emilio Pineda, Fixing State-Owned Enterprises, 2019.

2 Natural Resource Governance Institute, NRGI Data for 2015.