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Every gamble carries risk. Even the 1996 Chicago Bulls lost a game to the mediocre Denver Nuggets. There are always factors we cannot foresee, even in a sure bet it is possible for your horse to stumble on the racetrack or for improv to knock out the heavyweight champion.
A bettor should know that the greater the risk, the greater the reward—but also understand that it is a game of probability in which, if you bet on a very improbable outcome, it will be very difficult to get any return and only someone very irresponsible would bet with their wealth on such a gamble.
The Cardenista gamble
On March 18, 1938, oil was nationalized in Mexico. This was not a heroic and patriotic act but a response to disputes and contractual breaches between the international oil companies operating in Mexico and the Sindicato de Trabajadores Petroleros de la República Mexicana.
In contrast, the legend we are told about the expropriation begins with a daring Lázaro Cárdenas who confronted the oil companies to “give Mexicans back their patrimony;” our grandparents and great-grandparents helped pay for the expropriation with their savings. It was a demonstration of patriotism comparable to the War of Independence, a gamble on the future of the Mexican nation.
The Cardenista epic is now so well established in Mexican ideology that almost 84 years later, there are no voices in the public arena that dare to question the state’s ownership of oil.
The emergence of structuralist economics helped to strengthen the ideas of oil nationalism that would reach its peak in the early 1970s with one of the unfortunate coincidences in Mexican history, the almost simultaneous discovery of the Cantarell Field and the 1973 Oil Crisis.
The world lacked oil and Mexico had plenty to spare. Or in the words of President José López Portillo in a speech before the Board of Directors of PEMEX in 1977: “(Mexico)… has been used to managing shortages and crises… now we have to get used to managing abundance…”
The moment to collect on Carden’s bet had arrived. But there was no abundance for anyone, the oil rent became a current expense and an excuse for the Mexican government to never tighten its belt and to break spending records every year.
The extraction of crude oil, PEMEX’s biggest business, has been in a steady decline for 15 years now, exports have been in the same direction for almost 10 years and the company has been operating at a loss for more than a decade. It would be very irresponsible for anyone to bet our taxes on the future of this company.
When López Portillo bet everything on PEMEX, the odds favored him on all sides and the visible risk was minimal, but he was more irresponsible than smart, he abused the debt and monetary policy assuming that oil prices would be sustained and lost everything, although fortunately for him it was time to hand over the country, with all its problems, to someone else.
Second time as a tragedy
Today, Andrés Manuel López Obrador (AMLO) has decided to bet everything on PEMEX again, to revive the 70s idea of autonomy and the Cardenist myth of oil nationalism. Just like López Portillo, AMLO speaks of a past in which we were plundered and which he will not allow to happen again, although, more accurately, he compares himself to a tiger and not to a dog.
He has decided to opt for an old strategy that has never worked: import substitution. Although PEMEX’s business has always been the export of crude oil, AMLO has opted to invest 1.6 billion dollars in rehabilitating existing refineries, 600 million in building a new one and 1.6 billion more in buying a refinery in the United States. 3.8 billion dollars in new investment in refineries for a company that lost around 11 billion dollars in its refining “business” in 2020.
On December 28, 2021, together with Octavio Romero, director of PEMEX, AMLO seemed to make an April Fool’s Day joke, the Energy Transformation Plan. It was not a joke but a new bet by means of which crude oil exports would be gradually stopped until 2023 so that 100% would be refined in national territory.
AMLO’s gamble is that the demand for fuels and oil extraction in Mexico will continue for 20 years. Everything indicates that this is an irresponsible bet, but stranger things have happened. In the meantime, the taxpayer will continue to be indebted and will have to internalize the costs of PEMEX, while the issue of privatization will remain taboo.
José Torra is an economist, Research Coordinator at Caminos de la Libertad, co-author of the Fraser Institute's Economic Freedom of North America Index, and co-host of the podcast Libertad Aquí y Ahora // José Torra es economista, Coordinador de investigación en Caminos de la Libertad, coautor del índice Economic Freedom of Northamerica del Fraser Institute, y co-conductor del podcast Libertad Aquí y Ahora