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Pemex’s Fall: a Lesson for Mexico about the Market and the State

By: Rafael Ruiz Velasco - Jan 3, 2017, 1:34 pm
(Igas) Pemex
For decades, Pemex represented the triumph of the State over “the oligarchy and the evil yankee empire.” (Igas)

Español“Pemex is not for sale,” thousands of Mexicans chanted when they took to the streets to protest against the energy reform that began its long legislative journey in early 2013. The reform is stumbling today, and is beginning to have an effect on Mexico’s energy market.

Not surprisingly, nationalists dared to express their feelings toward a parastatal company with such a transcendental and personal word as “love.” 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.

Since Lázaro Cárdenas founded it in 1938, the organization’s common denominator has been the feeling of omnipotence based on high oil reserves, the monopolization of its use, State exploitation and the absence of substitute technologies.

The lack of competition in such a strategic sector allowed decades of operational inefficiency, phantom contracts, institutional nepotism, millionaire retirements and a myriad of irregularities that are now being exposed as the primary cause of its imminent collapse.

Reality has finally reached Pemex, which not only faces millionaire losses, but will have to cope to survive with a cut of MEX $100 billion, which represent about 20 percent of its annual budget, and then begin to compete against powerful companies in the industry.

The internal crisis is such that even its former defenders and historical beneficiaries (the politicians) do not dare to advocate for it, or try to save what would once have been their great black gold mine and endless petty cash box. The reform approved by the legislature and promoted by the president, which allows price liberalization and the entry of private competition, was Pemex’s death sentence, at least as we know it today.

In the short term, this adjustment will generate uncertainty, and side effects that may be adverse to the individual and family economy across Mexico. For the time being, the government announced a 15- to 20-percent increase in hydrocarbon prices for January 2017 — something that will undoubtedly hit the local economy, and surely generate inflation.

Additionally, the announced price zoning process is still not clear enough to consistently predict its effects.

This sudden increase is due to the elimination of a historic subsidy to gasoline. Like all subsidies, it comes from the tax collection or the indebtedness of the State, both at the cost of the average citizen, so its elimination does not represent a negative thing by itself. The real problem is that the suppression of this subsidy is not accompanied by a reduction in the tax burden, which would be a logical and fair measure for the taxpayer.

By contrast, Mexican gasoline has one of the highest rates of taxes in the world. That is, about 35 percent of the the price the final consumer pays per liter is a consequence of a state tax.

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.

President Peña Nieto, as any politician would have done, did nothing but lie and deceive when he promised that gasoline prices would fall simply as a result of liberalizing the market. He forgot to recognize that the market is actually ruled by thousands of independent phenomena and individual decisions, and not only by a few central planners. His attempt to deceive was crude, since it was clear from the beginning that removing the subsidy would increase the final price for the consumer.

Despite these short-term problems that will undoubtedly arise after the fall of Pemex, we must analyze this event as a blow to the idea of State omnipotence, to the arrogant attempt of planning economic matters, and to systematic patronage in Mexican politics.

The end of a monopoly like Pemex is, after all, a lesson of the free market to the State. Therefore, the advocates of individual liberties and promoters of progress and sustainable development must celebrate it.

Rafael Ruiz Velasco

Rafael Ruiz Velasco earned a degree in Business Admininistration from the University of Anáhuac in México. He's passionate about development, project management, soccer, economics, and comic books.