Calderon vs. the Leftists

It’s a dire situation, but there is one small hope on the horizon. Felipe Calderon, Mexico’s current president, has finally taken the bull by the horns. Calderon realizes that if big changes aren’t made soon, Pemex will be in real danger of collapse… and the Mexican economy, too.

To avert disaster, Calderon wants to bring in outside partners for Pemex. He reasons that, if Mexico doesn’t have the know-how or the tech to handle deep-water drilling, it only makes sense to call on those who do.

There are plenty of savvy oil majors who would love to lend a hand. Brazil’s Petrobras is the leading candidate, with oil majors like Exxon and Royal Dutch Shell close behind. In other words, the deep-water expertise Mexico so desperately needs can be had… for a price.

The trouble is, Mexico’s leftists refuse to pay that price, and the law is on their side. Tragically, the Mexican constitution bars Pemex from forming partnerships with foreign oil companies. Mexican oil is apparently so precious, it’s better to leave it under the sea than let some outsider get their greedy mitts on even a fraction of the spoils.

It’s hard to understate the madness of this socialist sop. What kind of sense of does it make to bleed a vital enterprise dry, and then refuse it the ability to find help? In gobbling up Pemex’s cash and denying it the right to partner, this is exactly what Mexico has done.

It’s been said that Lenin would rather let his people starve than allow a private market in grain. Sentiment among Mexico’s left-wing patriots seems to run along similar lines. In their effort to ensure that every last drop of Mexico’s oil profit is reserved “for the people,” the people are put in grave danger.

Blockading Congress

Now we cycle back around to the opening story.

The 16-day blockade mentioned at the beginning of this piece just took place; left-leaning lawmakers were protesting a new bill floated by President Calderon. The bill was designed to — you guessed it — allow Pemex to engage in foreign partnerships.

Talk of “semi-privatization,” even on a very modest scale, set the leftists’ blood boiling. Calderon quickly denied any intent to privatize, saying he only wanted to open up new avenues for Pemex. But his ideological enemies would hear none of it.

The people, egged on by populist sentiment, decided to tilt against the bill, too. Andres Manuel Lopez Obrador, failed presidential candidate and bitter enemy of Felipe Calderon, led a march of thousands through the streets of Mexico City. Hopes of change were dashed, at least in the short term.

This blinkered attitude is the “hole” that could swallow Mexico. It’s a giant, gaping logic hole — one that the entire Mexican economy could fall into. One could also argue there is a hole in the Cantarell field, or that Pemex itself is in a deep hole, and in dire need of help to pull itself out… but let’s stop there.

More Profits, More Pain… or Both

So how will things turn out for Pemex? With the supply-and-demand equation as tight as it is, this is no idle question. Mexico simply can’t afford to let Pemex slide into oblivion — and neither can the world.

World demand for oil might dip in the event of global slowdown, but that dip is guaranteed to be temporary. The supply side math is tough, and yet the demand side math is tougher still. Not a barrel of crude can be spared, especially with the world’s biggest fields headed for terminal decline.

At some point, Mexico’s self-important leftists will have to face reality. The Pemex debacle can still be papered over, for now, thanks to the glut of cash flooding in. But the longer the wake-up call is put off, the more it will hurt when it comes. (A frying pan to the face comes to mind.)

There is some good news to consider. When Pemex is finally allowed to bring on deep-water partners, there will be a gusher of profits — not just for Petrobras or Exxon or Shell, or whoever steps up to lend a hand first, but also for the various oil service companies, drill rig companies and extraction technology companies that will come in, benefit from spillover activity, and so on.

Of course, one can rarely count on politicians to catch on quickly. If the Mexican government drags its feet in getting help for Pemex, and the foot-dragging goes on for months or even years yet, that just means more upward pressure on the price of oil. It’s little wonder Arjun Murti thinks $200 a barrel could arrive in the next two years.

Curse Not the Gas Pump

There isn’t a whole lot you or I can do here, other than watch and worry and prepare for what might come. But that doesn’t mean we have to be victims. We can recognize what’s happening, and invest accordingly.

To that end, I urge you to check out our various newsletters: BreakAway Investor, Material Profits, the Taipan flagship letter, and so on. The Taipan team has come up with a number of excellent ways to profit from these inevitable oil and gas trends… and there will, no doubt, be many more opportunities to come.

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