This article was published by The McAlvany Intelligence Advisor on Monday, November 28, 2016:
According to the CIA’s 2015 World Factbook, Mexico had less than 10 billion barrels of proven crude oil reserves as of last December. That placed the country at 17th position, just ahead of Angola and just behind Algeria. The fact that it had ten times more than that underground and under the Gulf of Mexico didn’t matter. If you can’t get to it, it doesn’t count.
And ever since 1938 a succession of Mexican statist presidents made sure no one could get to it. When then-President Lazaro Cardenas “consolidated” all foreign oil producers by nationalizing their properties, he named the resulting company Pemex. And then he and future presidents milked it for all it was worth, funding various socialist projects, setting up retirement plans for their political cronies, and in general ignoring the untapped reserves lying just offshore.
When Enrique Pena Nieto (above) announced his plans to run for president to replace Mexican President Felipe Calderon in 2012, he promised big changes: he would keep Pemex (and its sister electricity producer CFE) as government assets but would allow outsiders to bid against them to develop those untapped reserves. For that he would have to amend Mexico’s constitution which prohibited any such thing.
But within two years Nieta had accomplished the feat. Not only did he win the presidency in December 2012 but he overcame political resistance (his party only had 38 percent of the Congress), and pushback from labor unions and the greenies, as well as resistance from those enjoying benefits from Calderon’s “presidential fund” for unemployed and retiring civil servants. Articles 28 and 29 were amended so that foreign interests could explore, extract, refine, transport, store, and distribute crude oil (and its derivatives) and natural gas. It also allowed private interests to bid on providing electricity in competition with the CFE.
When Nieto announced the reforms in the summer of 2014, he sounded like a disciple of Ludwig von Mises:
One of the key elements of the reform is to enable competition in the market. Competition should bring better prices to industry, which, in turn, can be more competitive, increasing exports, generating new employment and reducing prices in the local market….
If we really want to achieve change in these [industries], then this has to be a structural change … we have to be the government that knocks down the walls that are in the way of achieving a more equitable and just society.
Right move. Wrong timing. In November of that year OPEC decided to flood world markets with oil in an attempt (now failing) to drive out frackers producing in the United States. Crude oil prices fell from over $100 a barrel to (briefly) $26 a barrel. There just wasn’t much interest in drilling for oil under those conditions.
But that was then. In August Mexico put up almost 1,000 oil leases for bid, and more than 20 companies from around the world showed up at the auction to bid, including Exxon Mobil, Chevron, and Hess. The auction ends next Monday (December 5). Mexico expects to raise millions if not billions either from the auction or from participation in wells as they come online.
Business Insider was so excited it could almost be guilty of illegally touting Mexico as the next biggest thing. Instead it reprinted a report from James Stafford of Oilprice.com (with attribution, of course) who could hardly contain his enthusiasm for what’s going on in Mexico:
Welcome to the early stages of an oil and gas game that will be bigger … than anything in history. Mexico’s reform legislation … provides an unprecedented opportunity for oil companies looking to tap into Mexico’s huge oil potential.
One of those companies in the bidding for some of those leases is a Canadian oil developer, International Frontier Resources Corporation (IFRC), which said modestly that “IFRC believes that there are a significant number of under-exploited oil and gas fields in Mexico that will be issued in these bidding rounds.” IFRC also estimated that those leases are lying on top of – get ready – 115 billion barrels of oil. That’s an astonishing twelve times the World Factbook estimates! That would also, if those reserves prove out, push Mexico from 17th position to 6th, ahead of not only the United States (with 36 million) but also the United Arab Emirates (98 billion), Russia (103 billion, and Kuwait (104 billion).
The reserves have of course been there all the time, but there was no freedom to go and get them. Now there is. Investors are getting excited, along with those involved in the freedom fight. They have forever held that freedom is more important than prosperity, but in the real world they are inseparable.
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Sources:
BusinessInsider.com: Mexico’s oil reform is a huge opportunity
BBVA.com: 2016: A big year for Mexico’s energy reform
EIA.gov: Energy reform could increase Mexico’s long-term oil production by 75%
TheGuardian.com: Energy reform: will Mexico’s newest revolution boost renewables – or just fossil fuels?
Background on Mexico’s president Nieto
International Frontier Resources Corporation’s outlook on Mexico
CIA World FactBook: Proven reserves of crude oil by country in December 2015
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