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Dug in over oil

Mexican voters are resisting foreign investment in Pemex, but such a move could help the country.

August 02, 2008

The results of a recent referendum on permitting foreign investment in the state oil company are the latest indication that Mexican President Felipe Calderon is having a hard time selling his energy reform plan. Between 80% and 90% of voters shot down a proposal he has touted as vital to his country's future.

True, the nonbinding referendum was a stunt staged by the left-wing Democratic Revolution Party to garner headlines and rattle Calderon and his National Action Party, and turnout was negligible. Mexican news reports said a paltry 11% of voters participated, casting ballots in just nine of the 31 states where the referendum was held, as well as Mexico City.

Still, the vote should not be dismissed. Statistically it's irrelevant, but it's an accurate snapshot of the depth of resistance. The truth is, the Calderon administration's proposal to allow private investment in Petroleos Mexicanos and contracts for deep-water oil exploration is hugely unpopular.

Pemex's previous experience with outside investment saw Mexico's natural resources enrich foreign businesses, most notably in the United States, until they were booted out in 1938. That bad experience is still a lingering memory, but Mexicans are not just stuck in a time warp, refusing to be reasonable. They are understandably baffled as to why a company managing one of the world's great caches of crude is faltering at a time when oil prices are stratospheric.

Pemex is one of the world's top oil suppliers and the sixth-largest supplier to the United States; Mexico should be getting rich. But the country doesn't have the resources to retrieve and refine its vast reserves, and Pemex's output is dwindling at an alarming rate. In March, the administration predicted that production could decline by as much as 800,000 barrels a day by 2012. At the same time, Mexico imports more than 40% of its gasoline because Pemex lacks refining capabilities. Without reorganizing the company, this scenario will only worsen, and as Pemex goes, so goes Mexico; oil money funds 40% of the national budget. Dismantling Pemex's corrupt bureaucracy and creating a nimble corporate structure are essential to the country's economy.

Calderon is right: Opening Pemex to some private investment would enable it to plumb the fields of oil in the Gulf of Mexico. U.S. companies would certainly profit from joint exploration and refining efforts, but that doesn't automatically mean Mexico will suffer. Not this time.

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