Wednesday, March 21, 2007

Mexico screws up oil

Sorry I didn't post a link to this NYT story earlier; now it's a pay-to-read. The story it tells is important, however.

Basically, it tells about how government control and politics have made Pemex, Mexico's nationalized oil company, which should have been a source of continuing revenue, a mess. Its production and proven reserves are falling. Mexico is still the second-largest supplier of foreign oil to the U.S. (after Canada), but exports are falling. At the present rate of decline it could soon have trouble meeting domestic demand.

The main reason is that the government siphons off most of the money for other purposes, leaving little for upgrading facilities, exploration, and even simple maintenance. Aging oil rigs in the Gulf of Mexico simply allow natural gas to burn off because Pemex lacks the facilities to process it.

The story outlines any number of reasons, without coming to the conclusion or grappling with the implications, why government ownership of the means of production is a bad idea. Sure, the Mexican government is corrupt, but it isn't just a Mexican problem. Governments have strong incentives to extract as much money as possible from resource companies (Pemex supplies 40 percent of the Mexican government's budget) and to make agreements with unions that lead to grateful workers but high labor expenses and inflexible and inefficient work rules (featherbedding).

The government's incentive also is to postpone investment in future development since the government always "needs" maximum revenue now and the oil monopoly faces no domestic competition. Then, when maintenance has been neglected so things are really dilapidated, it becomes much more expensive to try to catch up and modernize. Whether politics will allow that now for Mexico is a dicey proposition. Mexico also outlaws joint ventures with foreign companies, which might have been a source of investment capital.

The existence of these incentives is one reason I don't worry all that much about Venezuela's Hugo Chavez. For a long time Venezuela's oil industry, although government-owned, was relatively free of political interference. Chavez, however, is intent on further socializing all aspects of Venezuelan life. The cushion provided by oil revenues has allowed him to do and advocate economically inefficient policies, but the more firmly he controls and politicizes the oil industry the more likely he is to screw it up and face declining revenues. Sad for Venezuelans but a relief for the U.S. and the rest of the hemisphere.

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