With the unceasing concern about climate change and the geopolitical situation in the Middle East, for people all around the world the oil industry is never far from the public’s conscience. And Mexico is no different. The first protests against government enforced fuel price increases in Mexico, nicknamed the “gasolinazo”, took place on 1 January this year, the day prices swelled.
Since then, citizens have plunged parts of the country into chaos – blocking highways, petrol stations and installations of the state-run oil giant Pemex. Hundreds of stores have been looted, countless arrests made, along with many injured, and several deaths occurring. Some Mexico City police have even been caught on video filling their patrol cars with ransacked merchandise. Four officers have been fired as a result. Social media also played a part, with bots posting fake news and encouraging looting, which resulted in hundreds of stores in Mexico City closing for a day, with 52 million pesos ($2.4m) lost in revenue.
For the previous 75 years, Mexicans have enjoyed a state-absorbed subsidy on locally produced oil. In 1938, then President Lázaro Cárdenas signed orders that barred all foreign oil companies from the country and established stated owned firm Pemex. That all changed in 2013 however, when these were removed by congressional vote.
In that time, the Mexican energy industry chose to focus the majority of production on easily extracted oil and natural gas resources. But as the worldwide trend has shown this type of energy is becoming increasingly difficult to find, as a result, Mexico has faced declining production levels and increased exploration costs, importing two-thirds of its petrochemicals, half its gasoline and one-third of its natural gas.
Globally, the trend has been to utilise newer technologies, such as fracking and deep-water drilling. This has been the defence used by the Mexican government to remove the monopoly; Mexico´s Pemex contributes 90 percent of its annual profits to the government, revenue that comprises about one-third of the country´s federal budget, and the company has been unable to afford to invest in these new technologies.
Bidding began in 2015 and there are now private companies investing in oil exploration and production in Mexico. This also meant making Mexico´s subsidised fuel market more attractive to foreign investors. When it was putting together the reform, the government intended for fuel prices to be liberalised and brought in with market prices. In addition, two additional taxes were also brought into effect at the start of the year. This resulted in the 20 percent price increase, along with the ensuing protests and anti-social behaviour.
Mexico´s President Enrique Peña Nieto pleaded for the country to understand his decisions by televised address earlier this month. “Allowing gasoline to rise to its international price is a difficult change, but as president, my job is to precisely make difficult decisions now, in order to avoid worse consequences in the future,” he said. “Keeping petrol prices artificially low would mean taking money away from the poorest Mexicans, and giving it to those who have the most.” Nieto maintains that the eradication of government subsidies will ensure funding is delivered to these poor Mexicans.
Photo credit: Enrique Castro.
The country´s ire centres on the indiscriminate effect oil price increases will have on the general population. In Mexico City, a protester describes it succinctly, “it’s not because we all have cars. When gasoline prices go up, everything else goes up: tortillas, public transport, everything.”
At best, it can be viewed as a central government adjusting to teething problems of privatising a previously government assisted industry, or at worst as the justified result of a government being punished for being money-grubbing with their citizens. That debate is not being raised here; what should be discussed is whether the centralisation of oil industries is a viable idea itself.
Arguably, the country that has prospered the most from pragmatic and sensible decision-making is Norway, and their dealings with their state oil supplier Statoil. Utilising a rich, efficiently administered country, together with an educated workforce, they nationalized their oil industries in the early ‘70s. Government ownership of Statoil currently lies at 67 percent.
Latest estimates have Norway´s Government Pension Fund worth over $800 billion, generating an annual return of 3.8 percent between 1998 and 2014. Assistant director general of Norway´s finance ministry, Ingvild Wold Strømsheim, has indicated that the oil fund had been helpful for the economy, and that details on the use of oil money and its savings were made public for all Norwegians to peruse.
This level of transparency shows that citizens are the owners of these assets, with Parliament representatives acting as custodians, who have the final word on the actions taken with Statoil. Ultimately, if the business decisions in regards to the largest government assets are not congruent with the opinions and desires of the electorate, it’s likely these public servants will be replaced. Operating in this manner has been seen as a blueprint for success by a number of bodies, which include think tanks in Canada and the African National Congress.
However, it may be unrealistic to expect Mexico to replicate the approach adopted by the Norwegian government. Norway benefits from virtually non-existent corruption, while the same cannot be said of Mexico. Additionally, tax collection in Norway was already high before oil was discovered – and it has remained this way despite income generation from oil resources and the political reward of potential tax cuts. Norway also possesses one of the lowest rates of income inequality amongst its relatively paltry population of 5.2 million.
Sure, not every country can reap rewards from the pragmatic approach of the Norwegians. To invest government revenue from a prosperous oil firm into a central pension fund, when other priorities lie at the needs of the constituent, would require decisions made with courage and foresight. This can be a tricky seesawing act between centralised control and laying at the mercy of market fluctuations.
President Nieto has shown his willingness to implement changes for the future, regardless of how unfavourable these may be. Both he and Mexico need to strike that balance in order to minimise damage from within.
Fred Johnston is a freelance writer from Central Australia who loves writing about topics he can add value to. Say hello to him on Twitter at @FreddyKuma.