Carl Horowitz

Unless one has been in hiding these past few months, the most defining aspect of our daily national life, beyond the inevitable rah-rah of the presidential campaign, has been soaring crude oil prices, manifested in $4 per gallon-plus prices at the retail gasoline pump. Countless explanations can be offered for this turn of events. Yet one in particular merits more attention: corruption in the oil industry south of the border.

For better or worse, Mexico is America's third-largest foreign supplier of crude oil, right behind Canada and Saudi Arabia. This cauldron of political instability provides us with around 1.25 million barrels a day, a figure down by around 200,000 from a year ago. Corruption, including from within the union representing most oil workers, has a lot to do with the drop -- and likely future drops.

It's been a fact of life for 70 years: Mexico's oil industry is a state-run monopoly. Back in 1938, in a pique of nationalist fervor, their government, led by President Lazaro Cardenas, expropriated (i.e., stole) the assets of American and Anglo-Dutch petroleum companies against whom Mexican workers were striking. The government quickly reorganized this wealth into an entity called Petroleos Mexicanos, or more simply, Pemex. Just to make sure the company wouldn't get any ideas about asserting its independence, the government amended its constitution of 1917, granting to itself complete authority over the processing and distribution of oil and natural gas. Each year, believe it or not, Mexicans celebrate the date of this event -- March 18 -- as a national holiday. It's called Oil Expropriation Day.

The enforced commingling of industry and state power has been a mixed blessing at best. Having been shielded from competition, Pemex has managed to incur high operating expenses, despite engaging in relatively little exploration. The result is an entire economy, and not just an industry, in perilous straits.

As Pemex goes, so goes the Mexican economy. The company generated nearly US$200 billion in revenues in 2006, making it the tenth-largest oil-based enterprise in the world. But there's a downside to this. About 60 percent of those revenues go for paying taxes and royalties to the Mexican government. Indeed, 40 percent of the government's revenues come from Pemex, most significantly a 71.5 percent levy on the value of all oil and natural gas produced. This alone puts the corporation at the whim of each successive six-year presidential administration. "It's effectively a government department of the moment," observes Matthew Shaw, senior Latin American analyst for the Edinburgh, Scotland-based energy industry consulting firm, Wood Mackenzie.

Carl Horowitz

Carl F. Horowitz is director of the Organized Labor Accountability Project of the National Legal and Policy Center, a Gold Partner organization dedicated to promoting ethics in American public life.
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