Nationalism, Crony Capitalism
May Thwart Mexico in Boosting Oil Production

By DAVID LUHNOW

With oil prices at dizzying heights, the world could use as much oil as possible. Don't count on Mexico to help.

Mexico's oil output is falling, and the country could cease to be a major oil exporter in a few years. That's bad news for the world -- and for the U.S. in particular. Mexico is one of its top-three sources of foreign oil. If Mexico can't turn things around, U.S. dependence on Middle East oil will grow.

Mexican President Felipe Calderón is frantically trying to strike a deal to allow private oil companies to work with state monopoly Petróleos Mexicanos, or Pemex, in finding and exploiting new oil deposits. With oil finishing New York trading Friday at $105.62 a barrel, up 60% from the price a year earlier, increasing oil production would be a boon for the Mexican economy.

But those efforts look unlikely to succeed thanks to two immovable forces on the Mexican landscape: nationalism and crony capitalism.

The nationalism side of the equation is well known. In 1938, Mexico changed the history of oil by becoming the first major country to kick out private oil companies, setting up a state-run oil company in their place. At the time, poor Mexicans lined up to donate everything from jewelry to chickens to help the government pay off the foreign companies.

The expropriation of foreign oil holdings, an event highlighted in school textbooks, marked the first time Mexico felt truly independent as a nation. During the recent national holiday celebrating the expropriation, the leader of Mexico's main leftist party, Andrés Manuel López Obrador, threatened the government with blockades and possible violence if its proposed energy overhaul went through.

"Let me be clear...if they hand over our oil rents to the private sector, either national or foreign, there will be no way to improve the lives and working conditions of ordinary Mexicans, and it would cancel any possibility of transforming Mexico through peaceful means," Mr. López Obrador said to thousands of protesters.

Less understood is the other factor holding back Mexico's energy efforts: the legacy of crony capitalism. Much of Mexico's economy is dominated by family-run companies that have long ruled over their respective industries, squashing competition and charging consumers high prices. They rely on friends in the government to ensure favorable regulation or sweetheart contracts, don't give much back in philanthropy, and have a reputation for evading taxes.

As a result, many Mexicans don't particularly care for private industry or think capitalism is such a great thing. Polls show that Mexicans are almost equally opposed to letting Mexican private capital into the energy industry as they are to foreign private capital.

Consider Mexico's experience with privatization. Former state-run telephone monopoly Teléfonos de México, or Telmex, was sold to Mexican industrialist Carlos Slim. Some 15 years later, Telmex has far better service, but it still has a stranglehold on Mexico's fixed-line telephone system, blocking competition and charging high prices. Mr. Slim is now among the world's richest men.

"Mexicans associate private companies with higher prices, and they don't want to pay more for gasoline," says Jorge Buendía, a pollster at Ipsos-Bimsa, the Mexican affiliate of France-based polling firm Ipsos.

Moreover, many Mexicans see advantages to state-run companies even if they provide lousy service. Many poor Mexicans pay subsidized rates for electricity. For drivers, the government has kept gasoline prices from rising too fast in recent years, something easier to do through a state-run company that doesn't answer to shareholders.

Corporations' behavior has reinforced their negative image among ordinary Mexicans. The country's two leading broadcasters frequently use their news broadcasts to advance their owner's interests, often attacking personal or political rivals. Both networks have bullied the Calderón government to block the creation of a third television network. Just before national elections in 2006, the TV companies pressured lawmakers from all three main parties to pass regulations favorable to them.

The murky nexus between business and government has hurt hopes for energy-policy changes. Interior Minister Juan Camilo Mouriño, a close ally of Mr. Calderón and the man in charge of pushing through the plan, got in hot water recently when it emerged that his family's trucking company benefited from contracts with Pemex while Mr. Mouriño worked under Mr. Calderón in the Energy Ministry a few years ago. That kind of conflict of interest feeds suspicions that government officials want to allow private participation in the oil industry only to enrich themselves and their friends.