Econ 550 - Pemex

Roger Lockwood

ECON 550

April 11, 2016

PEMEX

PEMEX is a state-owned monopoly and standard business principles are not applicable.  This is a business in a unique situation.  Pemex’s monopoly exists only in its own country; in the international market it is still subject to the same law of supply and demand as all other firms.  

Mexico’s President Lazaro Cardenas nationalized the petroleum industry in 1939 with impeccable timing as President Franklin Roosevelt was preparing for World War II and did not want any kind of conflict with our neighbor.  Mexico was the sixth largest producer of oil in the world and the tenth largest in terms of net export as of 2007.  It is the second largest oil producer in the Western Hemisphere behind only the United States.  Oil revenues generate over 10% of Mexico's export earnings.  Pemex has a total asset worth of $415.75 billion, and is the world's second largest non-publicly listed company by total market value, and Latin America's second largest enterprise by annual revenue as of 2009, surpassed only by Petrobras (the Brazilian National Oil Company).  The majority of its shares are not listed publicly and are under control of the Mexican government, with the value of its publicly listed shares totaling $102 billion in 2010, representing approximately one quarter of the company's total net worth.

Like all government run businesses, it has not operated efficiently.  In particular, Pemex has not reinvested earnings in exploration for new sources of oil.  The government has been treating Pemex like a cash cow, trying only to maximize short-term profit.  Another significant competitive disadvantage is that Pemex cannot leverage its reserves as they are officially the property of the nation. The result has been a precipitous decline in Pemex’s production, beginning before the current oversupply of oil in the international market.  Pemex has long been an exporter of oil to the U. S., but many industry insiders fear that Mexico could soon become a net importer of crude.  Pemex will still own and operate the oil infrastructure in Mexico, from distribution to all gas stations in Mexico.

The leftist Party of the Democratic Revolution (PRD) has long fought any threat to Pemex’s monopoly.  However, In August 2013, President Enrique Pena Nieto proposed a bill to partly privatize Mexico's oil industry to attract the foreign direct investment needed.  Unfortunately, a recent auction of oil leases in the Gulf of Mexico failed to attract many foreign investors.  Reasons for this include the difficulty of cooperating with a state-owned monopoly and government regulations, Mexico’s endemic corruption, the drug wars, and of course the current glut on the market.  Pemex has traditionally been the source of one third of the income of Mexico’s government.  Recent history shows Pemex suffering a 25% drop in oil output since 2004.  Economists believe Pemex’s current decline is the primary reason the peso has reached historic lows against the dollar.