Continuity and change in the Mexican petroleum industry

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Continuity and change in the Mexican petroleum industry
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Thesis (M.A.)--University of Florida, 1991.
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Includes bibliographical references (leaves 100-108).
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by Jorge Luis Silveira.
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Typescript.
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Vita.

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CONTINUITY AND CHANGE IN THE MEXICAN
PETROLEUM INDUSTRY











By

JORGE LUIS SILVEIRA


A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE
UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS


UNIVERSITY OF FLORIDA


1991











ACKNOWLEDGMENTS


I would like to express my appreciation to the chairman of my thesis
committee, Dr. Steven E. Sanderson, and to the other members of the
committee, Drs. Terry L. McCoy and Frank Moya Pons. Their valuable

suggestions concerning the organization and presentation of this document
greatly improved the final product.

A substantial portion of the data I used in preparing this work was
obtained from several organizations in Washington, D.C. I would like to express
my gratitude for the patience and cooperation of the staffs at the Department of
State, the Library of Congress, the Organization of American States, the
Department of Commerce, and the World Bank. Dr. Peter Stern, director of the
Latin American Collection at the University of Florida, was also invaluable in
locating and procuring much of the data necessary for my research.

I would also like to thank the United States Army. Had it not been for
their fully funded scholarship and additional funds to research and write this
thesis, this study would not have been possible.

My sincerest appreciation goes to my wife Cathleen for her support,
encouragement, and understanding. Her willingness to modify her work
schedule to meet my requirements to include the typing of this document,
always provided me the time I needed to complete this project. My two children,
Catrina and Jeffrey, deserve credit for helping me keep my perspective and
sense of humor. I am also indebted to my parents, who provided assistance
and encouragement.













TABLE OF CONTENTS


ACKNOWLEDGEMENTS...................................................................................... ii

ABSTRACT .............................................................................................................. v
CHAPTERS
1 INTRODUCTION ................................................................................ 1

The Problem and its Significance................................................... 2
T hesis.............................................................................................. ..... 6
Summary ............................................................................................. 8

2 THE FORMATIVE YEARS OF THE
MEXICAN OIL INDUSTRY, 1900-1938................................... 10

Introduction ......................................................................................... 10
The Birth of the Industry .................................................................... 11
The Oil Controversy........................................................................... 14
Carranza and the Constitution of 1917.......................................... 18
The Sonora Group............................................................................. 23
Lazaro Cardenas and the Expropriation....................................... 28
Summary ............................................................................................. 31

3 FROM THE FORGING OF A NATIONAL OIL COMPANY TO THE
OIL BOOM, 1938-1982: THE FIRST TRANSFORMATION..... 33

Introduction ......................................................................................... 33
The Formation of the National Oil Company ................................ 34
Incorporation of Petroleum Nationalism........................................ 43
The Roots of PEMEX's Transformation.......................................... 62
The Transformation of Mexican Petroleum................................... 66
Political Implications of the Petroleum Expansionist Strategy ..... 69
Domestic Criticism of the Oil Boom Strategy................................ 74
Summary ............................................................................................. 76

4 THE CHANGING FACE OF PEMEX IN THE 1980s..................... 79

Introduction ......................................................................................... 79
The de la Madrid Administration and the "New PEMEX". ............. 81







PEM EX Restructuring Under Salinas............................................ 89
The Petrochem ical Sector................................................................ 90
O PEC Solidarity ................................................................................. 92
International O outlook ......................................................................... 93
O il Union Confrontation .................................................................... 95

5 CO NC LUSIO N ................................................................................... 96

REFERENC ES ........................................................... ......................................... 100

BIO G RAPH ICAL SKETC H ............................................... ................................. 109













Abstract of Thesis Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Master of Arts


CONTINUITY AND CHANGE IN THE MEXICAN OIL INDUSTRY

By

Jorge Luis Silveira

May, 1991

Chairman: Steven E. Sanderson
Major Department: Latin American Studies
This thesis analyzes significant background characteristics of Mexican oil
policy, examines the transformations of the petroleum industry in 1938 and
1976, and suggests a new transformation in the decade of the 1980s. The
research first focuses on the period immediately following the 1938
nationalization of the petroleum industry, when President Lazaro CArdenas
implemented fundamental changes to oil policy in response to the foreign

enclave period. Next, the focus turns to the L6pez Portillo sexenium (1976-
1982), when Mexican oil policy shifted from the traditional nationalistic role of
serving the public sector to a profit-seeking role. This dramatic metamorphosis

in the industry's history resulted from a new strategy of oil resource exploitation
adopted to resolve the existing social, political, and economic predicaments.
The analysis concludes with the central argument of the paper: that
policies pursued during the administrations of Miguel de la Madrid and Carlos
Salinas de Gortari suggest that a new transformation is occurring. The changes
include, but are not limited to, opening the industry to domestic and foreign








investment, privatization of segments of PEMEX, and the liberalizing of
contracts to private firms. These important developments must be understood in

the context of the debilitating effects of the debt crisis and the liberalizing trend
currently taking place in Mexico.














CHAPTER 1
INTRODUCTION

Since the turn of the century, the petroleum industry has occupied a
special place in Mexico. During the much heralded "Porfiriato," foreign
pioneering efforts were encouraged and carried out by a number of private oil
companies, mostly English and American. This foreign enclave period
coincided with a much larger drama, the Mexican Revolution. If there was any
agreement among the disparate elements vying for reform, it was in the
growing disdain with which they regarded the favoritism granted foreign oil
barons who exploited Mexico's petroleum resources. In the words of Robert F.
Smith, "the revolution stimulated Mexican nationalism in many ways and
helped to spread national feeling throughout the country" (Smith, 1972:78). It
was the assertion of national control over natural resources which captured
the essence of the struggle. The subsequent articulation of this fervent
nationalism reached its denouement with the expropriation of the oil
companies by President Lazaro Cardenas in 1938.

The nationalization of the oil companies was a watershed event in the
history of Mexico. It represented the "fundamental step toward consolidation
of the nationalist spirit that had given rise to the Revolution of 1910" (Meyer,
1972:173). More importantly, and part of the focus of this paper, is the impact
that this bitter history had on the formulation of oil policy in post-expropriation
Mexico. The attitudes resulting from the historical evolution of the industry








under foreign domination catalyzed a shift towards nationalistic petroleum
policies. In a word, "the expropriation and the events that preceded it placed
an indelible imprint on the development of Mexico's petroleum sector"
(Grayson, 1980:22).


The Problem and its Significance
As the nationalized petroleum industry evolved in the post-expropriation
period, a conglomeration of difficulties beset the nascent firm. The
organization of Petr6leos Mexicanos (PEMEX) was not deliberately planned.
Instead, it was "born out of a social struggle and given national form by the
vision of the men who shared its problems and progress" (Bermodez,
1963:127). The new managers, technicians, and governmental administrators
were able to overcome the initial problems and set out to establish policies
consistent with the industry's revolutionary roots. The historical antecedents
to the adopted policies were embodied in Article 27 of the 1917 Constitution
which ascribed a "public interests" role to the industry. The focus of the
ensuing period was conservation of the national patrimony and a move
towards self-sufficiency. Following this path of nationalist self-assertion, the
Mexican administrations "preferred to withdraw from the international oil
system to the greatest possible degree and to concentrate instead upon
fostering domestic industrialization on the basis of cheap oil" (Philip,
1982:145). The official policy of PEMEX was best described as follows:

The adequate supplying of the national market is the main
objective of PEMEX. Consequently, only surpluses are exported,
despite the higher yield that can be obtained from sales abroad.
(Director's Report, 1951, cited in Philip, 1982:336)








The taboo associated with the export of petroleum became the subject of
much controversy, particularly during the L6pez Mateos administration, when
attempts to increase exports to rectify the industry's financial insolvency
resulted in nationalist attacks on the administration. Debate also erupted
when attempts were made to allow foreign investment back into Mexican
petroleum. All attempts to change the conservative policy direction were
subsequently negated by the strong opposition. The industry settled into a
normal path of operation, that of supplying the public sector with its energy
needs. During Mexico's adoption of import-substitution-industrialization (ISI),
this policy came under sharp focus, as PEMEX supported the rapid
industrialization push with provisions of oil at anemic prices.
The adherence to the "nationalist-conservationist" doctrine eventually
resulted in a dilemma for PEMEX. With the confluence of the philosophy of
limiting exports and moderation in exploratory drilling, the oil industry found
itself incapable of adequately meeting the increasing demands of the
domestic market. This caused Mexico to increase its dependence on foreign
petroleum supplies, and by 1968 the nation became a net importer of
hydrocarbons.

The 1970s ushered in a new stage in the evolution of the national oil
company. Having served in the role of adjunct to industrialization, the industry
was best described "as a supplier to the local markets and as the government
partner in the new type of joint enterprise agreement" (Schurr, 1971:129). In
1972, PEMEX's discovery of the Reforma field (in the Tabasco and Chiapas
area) ultimately changed the policy direction of the oil industry. This discovery
of "new oil" in the southern fields "was decisive in the complete transformation
of PEMEX's position in the Mexican economy" (Philip, 1982:353). The








Echeverria administration took bold steps to make Mexico self-sufficient in oil
by increasing public investments in the oil sector. This new emphasis resulted
in Mexico becoming a net exporter of oil in 1974.

The significant transformation of the petroleum industry did not take place
until L6pez Portillo assumed the presidency in 1976. Caught in a serious
crisis of legitimacy extending throughout the social, political, and economic
spheres, L6pez Portillo transformed the role of the petroleum industry with a
vigorous program designed to exploit and export this newly found oil wealth.
Oil resource exploitation was based on the contention that oil could become
the panacea to Mexico's economic woes. Rapid expansion of this sector
became the keynote since the "oil card" seemed to be the only outlet available
for Mexico.
The decision to continue this strategy was accelerated in 1981 when
international oil prices increased dramatically. By this point, oil exports
accounted for over 75 percent of Mexico's foreign exchange earnings
(Grayson, 1983:415). The increased importance attributed to petrodollars
facilitated the growth of the gross domestic product (GDP) by approximately 8
percent each year between 1978 and 1981 (Teichman, 1988:151). Continued
reliance on this strategy led to an overheated economy fueled by huge oil
earnings and later accentuated the debt crisis of 1982.
This important metamorphosis in the role of PEMEX from adjunct to
industrialization to the engine of growth for the Mexican economy went
beyond the realm of economics. The importance attributed to PEMEX's
revenue potential influenced a transformation in the national political arena as
well. The "new oil" linked the President and the firm's director general as key
figures in the formulation of oil policy while the state assumed a more




5


centralized role in the planning process. Additionally, the emergence of the
"tdcnico" garnered new importance for the criteria used for the selection of the
nation's President. Suffice it to say, PEMEX became the center of attention in
the 1970s. As its role in the national economy increased, so did the role of the
political actors at the national level with respect to the formulation of oil policy.

In the decade of the 1980s there have been indications that a new
transformation is occurring, beginning under the Miguel de la Madrid
administration and accelerating under the current administration of President
Salinas de Gortari. Despite the continued practice of politicians invoking the
memory of the revolution to protect the oil industry, the promulgation of oil
policy seems to be taking on more pragmatic trends. The Mexican
leadership's historically rooted passion for the protection and control of its
natural resources for reasons of public utility may perhaps be more rhetorical
than a true reflection of nationalist intentions. With the oil boom, "the L6pez
Portillo administration decided to alter Mexico's traditional oil policies"
(Zoraida Vdzquez and Meyer, 1985:189), in response to the 1976 crisis
inherited from Echeverria. Moreover, as the debt crisis emerged as a result of
the "petrolization" of the economy, the Mexican polity has been awakened to

the limitations engendered by over-subscribing oil as the panacea for
Mexico's economic predicaments. Oil policy has thus become a central focus
for Mexican policymakers in recent times, and it will be interesting to analyze
the current shift in policy to determine whether the petroleum sector is
experiencing yet another transformation.

The purpose of this study is to examine the historical evolution of
petroleum policy in Mexico, to describe the 1938 and 1976 transformations of
the industry, and to indicate the extent to which a new transformation is








occurring in the 1980s. It is necessary to examine the controversial period

prior to the expropriation in order to understand how the deeply entrenched
"petroleum nationalism" guided the initial policies of the nationalized industry.

Furthermore, several important factors that account for the continuity and
change in the industry's evolution require investigation. These so-called
independent variables include the ideology of the revolution, the international
environment, internal politics, and the emergence of the oil card as the
dominant economic instrument. The confluence of these factors has helped to
shape policy and, more recently, has made oil the center of political debate.
Investigation of the Mexican petroleum sector is desirable due to the
growing economic importance of Mexican oil. With the oil sector providing
three-fourths of the nation's export revenues after the oil boom, petroleum

policy has become one of the most critical aspects of public policymaking in
Mexico. Moreover, PEMEX's importance has transcended its economic
importance. PEMEX's pervasive sphere of influence touches various political
and social sectors (See Figure 1-1), giving the industry a certain dynamic
quality. The current situation in the Middle East adds emphasis to the
importance of this inquiry.


Thesis
Public policy making is a very complex, dynamic process whose various
components make different contributions to it. [It] formally aims not only at
achieving what is in "the public interest," but at doing so by the best means. [It]
involves many values...identifying a 'good' best policy and executing it are two
different phases; the second does not necessarily follow from the first"
(Yehezkel Dror, cited in Megateli, 1980:XXV). These words can best be



































SMexico's petroleum sector
RZ PEMEX


Source: Baker, 1984:2.
Figure 1-1. PEMEX's Sphere of Influence








applied to L6pez Portillo's attempt to use oil as the springboard for Mexico's
economic development. As noted, the execution of this strategy proved
disastrous for Mexico. Upon President Miguel de la Madrid Hurtado's
assumption of office, intimations were made that a re-evaluation of petroleum
policy was necessary in order to recover economically and to avoid repeating
the previous failure of oversubscribing oil. A systematic review of the
available literature has convinced me that, beginning with de la Madrid, and
accelerating under Salinas de Gortari, a new transformation is occurring in the
formulation of oil policy. Current changes include the opening of the industry
to domestic and foreign investment, privatization of segments of PEMEX, the
diversification of exports, trimming of subsidies and the workforce, and the
liberalizing of contracts to private firms. In the words of George Grayson, "the
world oil glut and Mexico's subsequent need to avoid bankruptcy have
injected a rare element of pragmatism into Mexican energy policy" (Grayson,
1983:415).


Summary
The Mexican petroleum industry bears the stamp of its origin. After a
long period under foreign control, the oil sector was nationlized and became a
symbol of the revolution. The enclave period conditioned subsequent policy
to reflect a nationalist attitude in the fulfillment of its constitutionally mandated
social mission. The oil resource exploitation strategy adopted by President
L6pez Portillo in 1976 changed the industry's role from supplying the public
sector to a national revenue-seeking firm. The full effects of this program are
still being felt as a result of the debt crisis, but there are indications of a "new
PEMEX" evolving under Mexico's current administration.








In the following chapter, the historical evolution of the industry, leading to
the expropriation, will be presented to reveal how the industry's infancy
chartered a conservationist approach to oil policy. Chapter 3 will analyze the
inherent problems facing the newly nationalized industry. The evolution of
nationalistic oil policy and its subsequent transformation will also be
addressed. The proposed new transformation will be evaluated in Chapter 4,
relating such factors as the debt crisis, the opening of the economy by
President Salinas, and the crisis in the Middle East. Additionally, my findings
and informed speculation on the future will be presented in the concluding
chapter.












CHAPTER 2
THE FORMATIVE YEARS OF THE
MEXICAN OIL INDUSTRY, 1900-1938


Introduction
Studies of Mexico leave little doubt that the early history of its oil industry
played an important role in the genesis of oil policy. The early development of
the industry began to grow under the control of foreign companies, coinciding
with the most dramatic revolution in the history of Latin America. In the words of
many scholars, the oil industry seemed ripe as a target of opportunity for the
proponents of revolutionary nationalism, as "every facet of petroleum
development in Mexico was replete with the grievances most often cited as
causes of the Revolution" (Baldridge, 1971:32). The use of concessions,
favoritism, and inducements to lure foreign capital did attract foreign
entrepreneurship, but also served to fuel growing discontent in Mexico over the
rightful ownership of Mexican oil and property.

The foreign domination of the petroleum sector was especially relevant to
the policy making decisions made concerning the industry prior to and
following the expropriation of the foreign oil interests on March 18, 1938.
Analysis of the petroleum industry in its infancy gives some support to the view
that attempts to formulate policy, regardless of intent, were overshadowed by its
history. The industry inherited "the status of a sacred symbol of dignity for a
highly nationalistic people" (Grayson, 1980:xvii). It seems a safe assumption
that this distinctive quality played a significant part in both the development of
the industry and in the making of future oil policy decisions.










The Birth of the Industry
The first significant oil discoveries were made by foreign companies in
Mexico at the turn of the century. The oil development was encouraged by the
overall policies of the Porfirio Diaz administration (1876-1910). His policies
were a direct reflection of Mexico's lack of indigenous capital. "Early in his
presidential career Diaz had decided that the development of Mexico depended
upon large-scale foreign investments, and he instituted a variety of policies to
make Mexico safe and attractive for business" (Smith, 1972:2). The favorable
climate for investment provided by this policy included low taxes, physical
protection, subsidies, legal guarantees, and governmental concessions to
public lands and waters.

A potentially controversial concession which reflected this opening to
foreign influence was the Mining Law of 1884, which gave subsurface
development rights to the owners of the land. The law, which favored well-
endowed foreigners who could lease or buy up land cheaply, reflected the
emergence of Diaz' "scientific" approach to policy. His advisors, the so-called
"cientificos," "were imbued with Herbert Spencer's Social Darwinism and
August Comte's positivism, and believed in the inestimable value of technology,
the advancement of the country through investment in mines, railroads,
factories, and harbors, and the superiority of white men over Indians and mixed-
breeds" (Grayson, 1980:4). This group of men freely granted favors to foreign
interests. According to J. Richard Powell, the "cientificos" were materialists of
great ability who "became progressively more the agent of foreign capital"
(Powell, 1956:8). Within the framework of the areas emphasized for investment,
Porfirio Diaz particularly favored the foreign development of the petroleum
industry because he desired to end the country's dependence on coal as the








principal source of energy for the railroads and the mining and electric power
industries (Meyer, 1972:4).
Foreign participation in the petroleum industry encouraged by incentives
came primarily from British and American interests. In 1900, Weetman
Pearson, a British engineer, formed the Mexican Eagle (El Aguila) Petroleum
Company. Shortly thereafter, Edward Doheny, a wealthy American oilman,
founded the Mexican Petroleum Company. The latter produced the first
commercial oil well in Mexico the following year. In his book The United States
and Revolutionary Nationalism in Mexico, 1916-1932, Robert Freeman Smith
noted that the Mexican elite's granting of concessions and enactment of laws
favoring the foreign companies were based on their "simplistic belief that
government cooperation with private enterprise would automatically lead to
progress and modernization" (Smith, 1972:4). The two oil interests did indeed
make progress at an alarming pace; however, it was accomplished at the near-
exclusion of a number of Mexican independent oil companies. In the words of
Lorenzo Meyer, "the small independent enterprises belonging to both
foreigners and Mexicans and numbering in the several hundreds were
insignificant" (Meyer, 1972:5). The output of the Mexican independents never
exceeded three percent of the national total from the onset of petroleum
development until the historic nationalization of the industry in 1938 (Meyer,
1972:5).

The rapidly-acquired importance of Doheny and Pearson diminished the
significance attributed to the participation of Mexican capital. On April 3, 1904,
Doheny produced the most promising find in Mexico, a well yielding fifteen
hundred barrels per day (bpd) at a depth of 1,650 feet (Grayson, 1980:7). The
success of this find sharply increased output, and led Doheny to form the








Huasteca Petroleum Company to explore areas not included in his original
holdings.
Pearson also profited greatly from the Diaz administration's assistance in
land acquisition, helpful legislation such as the right to import all necessary
drilling and refining equipment tax free, and the exemption from virtually all
other federal taxes. It is believed that Pearson garnered more profits from
Mexico than any other man since the Spanish conquest (Rippy, 1959:101). He
and Doheny ushered in a new wave of foreign capital to Mexico thereby
assuring foreign domination of Mexican petroleum. The petroleum monopolies
included the main oil firms of Royal Dutch-Shell, Standard Oil of New Jersey,
Gulf Oil Corporation, Sinclair, Cities Service, Warner-Quinla, Continental Oil,
Union Oil, South Penn, Mexican Seaboard, and Pierce Oil. Between 1901 and
1938, these firms produced more than 90 percent of the petroleum extracted in
Mexico (Meyer, 1972:5).
One common theme throughout the last ten years of the Diaz
administration was the extensiveness with which foreign interests, governed by
little or no regulation, exploited the favorable concessions granted by the
Mexican government. The companies were, in essence, protected by a series
of laws facilitating their pursuit of profit. The first of these laws, the Petroleum
Law of 1901, enabled the Diaz administration to permit concessions in zones
belonging to the state to companies established in Mexico. This law allowed
Doheny and Pearson and other private companies to extend their operations to
vast expanses of vacant public lands. Diaz wasted little time in introducing
legislation reaffirming the subsoil rights of the surface owner by enacting the
November 25, 1909 Mining Law. The impact of this law would be felt in
subsequent years as it became the basis for the oil interests' resistance to the
nationalization of Mexico's oil (Bermidez, 1963:3).








Foreign oil companies were being favored by the conscious objectives of
Porfirian policies, producing growing objections in a country burgeoning with
the spirit of reform. The early development of the industry left a historical legacy
which reflected a strong sense of national identity rooted in a genuine distrust of
the oil barons. The virtual lack of government regulation or restriction on the
activities of the foreign oil interests would soon come to an impasse after
Francisco I. Madero, the first national leader of the Revolution, seized power
from Diaz on 25 May 1911. According to Smith, the Diaz policies propelling oil
development in the decade from 1900 to 1910 served to intensify Mexican
nationalism and heightened the concern over the foreign monopoly of Mexican
oil and property (Smith, 1972:8). By the use of such congenial policies towards
foreigners throughout that decade, it is quite clear how the assertion of national
control over the nation's natural resources would become a major concern in
the revolutionary period which followed.


The Oil Controversy
Paul E. Sigmund aptly summarizes in the following passage the conflict
which consumed Mexico with respect to the petroleum industry prior to the
expropriation in 1938:

The picture that emerges from the disputes of the 1920s and
1930s is a rather consistent one. A weak Mexican government
continually threatened by internal revolts was attempting to
reassert the principle of national ownership of mineral resources,
which it viewed as a fundamental law that had been violated by
Porfirio Diaz. The oil companies, on the other hand, took
advantage of the financial and political weakness of the
government to prevent new government controls on their
operations or the establishment of the principle that the oil wells
were in any sense national property. They were able to enlist the
support of the United States government in their behalf, both
because they could point to the Porfirian laws under which their
original investments had been made and because American







diplomats considered it their duty under international law to extend
diplomatic protection to the property of American citizens, whether
agricultural or mineral. In defense of American property, the United
States possessed a powerful battery of weapons, including denial
of diplomatic recognition, control over the flow of arms, withholding
of loans, and in extremis armed intervention. (Sigmund, 1980:54)

While differing factions staged a bloody revolution, the Madero
administration levied the first tax on oil production in 1912. More efforts to
increase fiscal revenue occurred under subsequent administrations (see Table
2-1). Nevertheless, efforts to obtain the taxes per ton of oil produced were not
enforced as the years of bitter civil war followed "during which time it could not
be said for certain that any particular individual controlled the government"
(Gordon, 1975:59).
The oil tax decree imposed by Madero came at a time when Mexico was
in dire need of revenue due to rising military costs and general economic
distress. This act marked a definite change in the Mexican government's
dealings with the oil companies and sparked a vigorous campaign of hostilities
between the companies and the government. According to Lorenzo Meyer, "the
oil companies' real objection was not to paying the tax itself but rather to setting
a precedent whereby the Mexican government could change fiscal policy
unilaterally in the future" (Meyer, 1972:31). The short-lived Madero
administration, in an attempt to assume a modicum of control over the foreign
enclaves, adopted a law requiring all oil companies to register with the
government. In addition, the companies were to submit declarations regarding
the value and makeup of their enterprises. If the oil companies did not abide by
the decree, the Mexican government threatened to fine them 5 percent of the
value of the property (Meyer, 1972:32). These actions produced the "catalytic














Millions
of Barrels
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
1


910


1920


1930


1940


1950


Source: Powell, 1956:53.


Figure 2-1. Crude Oil Production in Mexico, 1910-1950








agent," to borrow Robert F. Smith's phrase, which developed the oil companies'

hostility towards the Mexican government.
Concern grew out of the fear that Mexico was increasing attempts to
assume more control over the operations of foreigners in their country. The
restlessness created was more evident among the American oil companies who
had already felt the anti-North American sentiment present in Mexico. This
feeling originated during the latter years of the Porfirio Diaz administration as he
began to offer more attractive concessions to the British in order to prevent
American companies from monopolizing the oil market in Mexico. Due to
concern for their interests, the American companies turned to the State
Department for protection of these interests.
Despite the concern created by Madero's policies regarding the oil
companies, his reformist moves did not come to fruition. On February 19, 1913
he was forced to resign and was later assassinated. The long period of internal
strife, which followed for more than a decade, prevented the development of the
regulatory measures he had introduced. The period that followed was
characterized by civil war and the appearance of provisional presidents who
"adopted, rescinded and readopted a number of oil laws according to the

position of those who happened to be in power with regard to the oil companies
and their backers" (Bermudez, 1963:4). Although early efforts by the Mexican
government to change the Porfirian era's policies favoring foreigners gained
momentum, the nation was not in a position to break the monopoly foreigners
had attained. Raymond Vernon aptly summarized the Mexican reform
measures in the Madero administration when he said: "although there were
allusions to the need to bring the foreign companies to heel, there was no real
substance in these allusions" (Vernon, 1963:61).








The intransigence of the oil companies worsened with each regulatory
move adopted by the Mexican government. The Mexican legislation were
labeled confiscatory by the oil companies, and their fear of loss of their interests
created a series of diplomatic parries and thrusts between the Mexican
government and the United States government which did not amount to much of
anything. The preoccupation with the international events in Europe also
tended to displace the attention of the United States away from Mexico.
Nevertheless, the State Department intervened to protect the oil companies
whenever measures were adopted that seemingly threatened their interests.


Carranza and the Constitution of 1917
It was not until the administration of Venustiano Carranza (1914-1920),
an old Porfirian politician converted to the Madero movement, that a Mexican
president proved capable of confronting the oil companies. He was the first
president since Diaz who was able to "unleash the forces of the Revolution and
bring down the buttress of what was left of the system held over from the
Porfirian era" (Meyer, 1972:42). In an effort to capitalize on the growing
nationalist sentiment in Mexico, Carranza was determined to assert "the
principle that Mexico is free to repeal or modify its laws which must be obeyed

by foreign interests, who ought to accommodate their activities to our laws
instead of using their influence with their governments in order to force Mexico
to accept legislation which is convenient to them" (Philip, 1982:203).

As the war in Europe took hold in 1914, Carranza set forth his policies to
modify Mexico's position with respect to its oil resources. His policies from early
on in his administration became increasingly important in the future
promulgation of the 1917 Constitution, involving changes that eventually
transformed the destiny of the Mexican petroleum industry. Carranza








considered oil and other petroleum products to be the property of the nation,
and he ordered several decrees and regulations, much like his predecessors, to
comply with his petroleum policy. This policy had two purposes: "(1) to return to
the nation by means of adequate laws, a mineral wealth of which it had been
deprived thoughtlessly and without cause; and (2) to conserve this same wealth
by means of strictest regulations based upon sound technical and economic
principles" (BermOdez, 1963:6). He therefore emphasized reforms "which were
concerned largely with regulation of foreign enterprise and the promotion of
domestic business interests" (Smith, 1972:19).

His policies further exacerbated the already tense relations between the
Mexican government and the oil companies backed by the United States
government. Carranza was seeking the legal compliance of the foreign oil
companies by enacting policies that promoted Mexican participation in the
industry. However, he intended to "control--not eliminate--foreign enterprises"
(Smith, 1972:76). The use of taxes, drilling permits, and the application of the
Calvo clause (whereby the firms had no right to diplomatic protection in the
event of a dispute with the government) to titles and leases (Meyer, 1972:46),
reflected Carranza's intentions to change the legal status of the industry that

was gaining prominence at the hands of foreigners. Again, the oil companies
began to worry that the Mexican government was attempting to deprive them of
holdings they deemed as having been legally obtained during the Diaz
administration. The host of decrees designed to assert national control over the
industry foreshadowed much that followed.
Despite the efforts by Carranza to control foreign economic influence
during the revolutionary turbulence, the oil companies continued to extract
petroleum resources from Mexico between 1914 and 1917. The demand for oil
surged during this period due to World War I and the expansion of the








automobile. By 1917, oil had become Mexico's leading export. The world war
had created such a demand for fuel that 3,700 bpd on the average were being
produced from the 174 wells in operation, which placed them among the most
productive wells in the world (Meyer, 1972:61). However, much to the anguish
of the Mexican administration, almost all of the wealth attributed to this
production left the country. The taxes collected for 1917 contributed less than 4
million dollars (Meyer, 1972:61). To make matters worse, the oil companies

aggravated the government's position by paying rebel leader General Manuel
Pelaez for protection of the oil fields against the forces of Carranza.

There was no shortage of politicians willing to exploit the domestic
discontent fomented by the actions of the oil companies. Carranza's
determination to maintain pressure on the oil companies in order to gain vested
interests by the state culminated in the promulgation of the 1917 Constitution on
May 1, 1917. The new Constitution, in the words of Robert F. Smith,
"represented an amalgamation of diverse views about reform and the nature of

the revolution" (Smith, 1972:7). Its principles are summarized by J. Richard
Powell in his work The Mexican Petroleum Industry: 1938-1950 as follows:

1. to break down the large estates, destroy the system of peonage, and

restore communal lands to villages;
2. to give workers greater participation in industry and a greater share

in both its benefits and its responsibilities;
3. to overthrow the system of special privilege and industrial monopoly
fostered by Diaz;
4. to restore the ownership of subsoil deposits to the state;
5. to control foreign economic influence in industry and agriculture;
6. to exercise controls in production, distribution, and agriculture;








7. to set up a genuinely national transportation system with less
emphasis on export and import facilities;
8. to correct the social and political problems arising from the
impingement of the two cultures of agricultural feudalism and
industrial capitalism so as to form a modern nation-state with
equality of rights and;
9. to make effective the separation of Church and state and to destroy
the Church's influence in economic life and in education (Powell,
1956:11).
From this point forward, Mexican administrations attempted to make
effective the aims expressed in the constitution. However, it is important to
qualify that the intention of these administrations was not to expropriate what
was considered national territory. Instead, their aim was merely to assert
control over the proper use of national property by means of government
regulations. Their instrument, as we shall see, was the granting of concessions
as opposed to relinquishing full property rights. According to E. David Cronon,
"the federal government might grant concessions to develop mineral resources,
but the legal capacity to acquire ownership of Mexican land was carefully
hedged by some stiff constitutional requirements" (Cronon, 1960:37). In that
vein, the provisions centered around altering the status of foreign investments in
Mexico. The two most consequential provisions with respect to the oil industry
were articles 27 and 123 because they addressed the ownership of subsoil
deposits and the status of labor. These two articles became the critical points of
contention between Mexico and the oil companies for the next two decades.
Article 27 represented the culmination of various attempts by the
nationalist revolutionaries to formulate a new policy which reasserted the
principle of sovereignty over subsoil deposits. The lengthy article has been








aptly summarized as follows by Wendell C. Gordon in his work The

Expropriation of Foreign-Owned Property in Mexico:

In the nation is vested direct ownership (dominio director) of
all minerals or substances which in veins, layers, masses or beds
constitute deposits whose nature is different from the components
of the land, such as ... petroleum and all hydrocarbons-solid
liquid or gaseous ....
Only Mexicans by birth or naturalization and Mexican
companies have the right to acquire ownership in lands, waters
and their appurtenances, or to obtain concessions to develop
mines, water or mineral fuels in the Republic of Mexico. The
nation may grant the same right to foreigners, provided they agree
before the Department of Foreign Affairs to be considered
Mexicans in respect to such property, and accordingly not to
invoke the protection of their Governments in respect to the same,
under penalty, in case of breach, of forfeiture to the nation of
property so acquired. (Article 27, May 1, 1917, cited in Gordon,
1975:60)
This provision infuriated the foreign oil companies, who denounced claims
that rights to the subsoil could be retroactively applied. This question of
retroactivity would be bitterly contested for years to come.

The labor issue also became a focal point of disagreement between the oil
companies and the government. Article 123 outlined the basic labor code for
workers. It stipulated that the work day would be limited to eight hours and limited
night work, it outlawed the performance of dangerous or unhealthy night work by
women and children, and mandated one day of rest for six days of work.
Additionally, it called for the establishment of a minimum work wage, and granted
employers and workers the right to organize as well as legalized nonviolent strikes

for cases that were intended to better the rights of workers with respect to
management (Powell, 1956:12-13). The Mexican workers, although receiving
salaries well above the national average, were treated harshly by exhausting work,
shabby living conditions, and unrelenting discipline. The dichotomy existing








between the conditions of the workers compared to those enjoyed by their foreign

managers sharply increased the revolutionary fervor of the Mexican populace.


The Sonora Group
The attempts to implement the constitutional provisions by law, particularly
Article 27, were met with fierce opposition by the United States and the oil
companies. The American concern engendered by this legislation is best captured
in the following words:

If Mexico could successfully establish the legal principle that private
real property was only a conditional grant, held at the pleasure of
the state and easily revokable, then foreign ownership might be
questioned in any debtor nation where caprice or malice dictated a
drive against alien holdings. If permitted to stand, this principle
would threaten foreign investment capital wherever an
underdeveloped country might become infected with the virus of
revolutionary nationalism. More was at stake than the holdings of
foreigners in Mexico, substantial though they were. (Cronon,
1960:43)

The United States' hegemonic response to the retroactive clause embodied in
Article 27 included the withholding of diplomatic recognition and the threat of
armed intervention to protect American interests in Mexico. Fortunately, the
interventionists led by Senator Albert Fall, could not sway public opinion
sufficiently to warrant the use of gunboat diplomacy.

The dispute continued to preoccupy the minds of Mexican politicians even
after the overthrow and assassination of Carranza in May of 1920. Although a
more cooperative phase in company-state relations followed, "Mexican officials did
not intend to surrender all hopes of recovering some control of petroleum
resources" (Smith, 1972:183). The oil companies feared that the retroactive
application of Article 27 was a clear threat to their established rights to the subsoil
obtained under previous laws. The administrations which followed the overthrow








of Carranza were composed of the so-called Sonoran dynasty of northern generals
under Alvaro Obreg6n and Plutarco Elias Calles (Durin, 1985:162), who sought to
obtain recognition by the United States government in spite of the litany of
regulatory decrees and the constitution which they had inherited.
Under Alvaro Obreg6n (1920-1924), the focus of diplomatic recognition took
center stage in an effort to stabilize his government and improve Mexico's position
in the eyes of the international community. Meanwhile, oil output began to decline
gradually after peaking in 1921. The daily yield for 1921 was an all-time high of
193,398 bpd, but a conglomeration of factors mitigated against investments in
exploration and development (Grayson, 1980:13). The oil companies' uncertainty
over ownership rights, prompted by the 1917 Constitution, caused them to extract
oil vigorously through 1921, resulting in the near depletion of existing wells.
Drilling permits, which had been banned under Carranza, were reinstated by
Obreg6n in an effort to revive exploration. However, the stalemate in negotiations
concerning the ownership of subsoil deposits spoiled the introduction of large
investments by the oil companies.

The Bucareli Agreement of 1923 marked the high point of the Obreg6n
administration's efforts at forging an oil policy that would quell ongoing
disagreements between the state and foreign companies. This agreement
prescribed that the oil companies had the right to explore for and produce
petroleum in the subsoil deposits as long as "positive acts," acts that showed the
intention of the owner to exploit oil (Powell, 1956:14), existed prior to the
promulgation of the 1917 Constitution.
The Mexican government succeeded in regaining diplomatic recognition
prior to the signing of the agreement, but due to the informal nature of the
subsequent discussions of Article 27 no headway was made on this divisive issue.
As the question of ownership remained unanswered, the controversy ensued in the








face of continued intransigency by the oil companies. The oil men unwillingly
complied with the host of regulatory decrees while protesting that the taxation
measures were confiscatory. Additionally, the requirement of confirmatory
concessions was viewed as a violation of international law. For both complaints,
the oil companies followed the common practice of seeking diplomatic protection of
their interests. Again, Washington stood firmly behind the oil company position as
evidenced in the words of Secretary of State Frank B. Kellogg: "The government of
Mexico is now on trial before the world, and we cannot countenance violation of
her obligations and failure to protect American citizens" (Secretary of State
Kellogg, cited in Cronon, 1960:47-48).

On December 1, 1924, Obreg6n's right hand man, General Plutarco Elias
Calles was elected as Mexico's president. In the words of Antonio J. Bermudez,
"petroleum matters from 1918-1925 were mostly settled by an anomalous system of

presidential rulings which often produced disconcertion and provoked difficult and
even contradictory situations, as each ruling was handed down for a single case
but nevertheless might serve as a precedent for other but never identical cases"
(Berm0dez, 1963:9). The situation changed when President Calles passed the
Petroleum Law of December 29, 1925, which implemented Article 27 of the
Constitution. With this legislation, Mexico proclaimed "the oil industry a public
utility, and oil concessions were henceforth to be granted separately for exploration
and for production" (Durin, 1985:166). The affirmation of direct national ownership
of the oil deposits in the form of a bylaw to the Constitution went beyond the
rhetoric of revolutionary nationalism expounded upon by Calles' predecessors,
and remained the foundation of the petroleum law in force up to the time of the
expropriation in 1938.

The new law stated that all contracts made prior to 1 May 1917 were still
valid, but limited them to fifty years from the date production started. The oil









companies once again sought the protection of their government. The aggressive
elements in the State Department led by the new ambassador to Mexico, James
Rockwell Sheffield, proposed an international embargo on oil shipments from
Mexico. Furthermore, these quintessential hardliners in Washington insisted "that
in the event Mexico did not give in, war was the logical terminal point of this policy"
(Smith, 1972:235). Fortunately, the lack of a national consensus in the United
States mitigated against adopting an interventionist policy. Nevertheless, Calles
revised the law in 1928 under increasing pressure from the United States
government.

The revision embodied in the decree of January 3, 1928 revoked the time
limit of fifty years, thus making the oil companies concessions' indefinite. The
amendment was a great victory for the oil companies in their struggle with the
Mexican government. Nevertheless, due to the constant pressures of successive
Mexican administrations, the incentives for increased exploratory drilling waned in
the face of a political climate of rising nationalist tendencies. It is understandable
therefore, that drilling began to decline precipitously, the old wells obtained during
the Porfirian era began to give out, and the oil companies began to turn their efforts
to Colombia, Venezuela and the Middle East where the risks were not as great.

As reflected in Figure 2-1, oil production had reached a peak of more than
193 million barrels in 1921 and fell off during the remainder of the controversy. The
decline, as mentioned, was attributed to the exhaustion of the old oil fields,
uncertainty engendered by Mexican laws and decrees, and high taxes (Powell,
1956:15). Despite this decrease in oil production, the controversy continued after
the Calles administration. During the subsequent Portes Gil, Ortiz Rubio, and
Abelardo Rodriguez administrations, the debate centered around the issues of














Millions
of Barrels
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
1


910


1920


1930


1940


Source: Powell, 1956:53.


Figure 2-1. Crude Oil Production in Mexico, 1910-1950


1950








taxation and drilling permits. These presidents adhered to the 1928 agreement
which had modified the Petroleum Law of 1925, and the oil reforms envisioned by
their revolutionary predecessors would remain on hold during this period. The
Depression of 1929 was one contributing factor which put to rest the insistence on
nationalization for the time being.


Lazaro Cardenas and the Expropriation
The election of Lazaro CArdenas in 1934, a young intellectual
considered to be more radical than the older generation of revolutionary
leaders, changed the program of enforcing the Constitution of 1917 which had
not been fulfilled by his predecessors of the Sonora group. His staunch
reformist tendencies" were especially sensitive to the decline in Mexican
idealism throughout the last years of Calle's domination, and he believed that
his country needed a restorative dose of Mexican nationalism" (Mancke,
1979:51). President Cardenas was an advocate for the reinvigoration of
nationalism. It is against this backdrop that the oil controversy must be
understood. Cardenas' incessant desire to fulfill the ideals of the Mexican
revolution and implement the precepts promulgated in the 1917 Constitution,
became the foundation upon which he sought to rekindle Mexico's
revolutionary nationalism. The following words extracted from Cardenas'
private diary state his feelings regarding foreign presence in the Mexican oil
industry:

Today Mexico has its great opportunity to shake off the
political and economic yoke that the oil companies have placed
upon us while exploiting one of our most important resources for
their own benefit and holding back the program of social reform
set forth in the Constitution. Various administrations since the
Revolution have attempted to do something about the subsoil
concessions being enjoyed by foreign firms, but up until now
domestic problems and international pressure have mitigated







against this effort. Today, however, the circumstances are
different: there are no internal struggles and a new world war is
about to begin. (Lazaro CArdenas, 1938, cited in Mancke,
1979:54)

President Cardenas' first step in this effort was the passing of legislation
in 1936 granting the Mexican government the right to expropriate any property
for public use with appropriate compensation granted to the oil companies. The
compensation to be paid would be based on the fiscal value of the property as
determined by an appropriate court. Additionally, the previously mentioned
labor question addressed in Article 123 soon became the main focus of his
actions against the oil companies.
The emerging labor conflict became the main threat to the oil companies
in early 1936 when the various oil unions united into one, Sindicato de
Trabaiadores Petroleros de la Repoblica Mexicana (Union of the Oil Workers of
the Republic), or STPRM. Before this took place, the oil workers were
organized in thirty-two locals with little or no uniformity. In fact, labor contracts,
wages and working conditions varied within the same company (Durdn,
1985:168). CArdenas wasted little time in affiliating the STPRM with the
Confederaci6n de Trabaiadores de M6xico (CTM), the government-controlled
workers union created in 1936, thus placing the STPRM under government
influence.

By cementing the oil workers under the control of the government,
CArdenas proceeded to arbitrate labor difficulties between the workers and the
oil companies. Shortly thereafter, STPRM convened a general assembly
resulting in the first collective contract covering all oil workers. A series of
demands directed towards the oil companies was also drafted, which included
better wages, fringe benefits, and working conditions. It was this set of








demands which turned out to be the deciding factor in the dramatic steps taken
by Cardenas in the expropriation of the oil companies.

The workers' foremost demand was an increase in wage and welfare
benefits in the amount of 26,329,393 pesos. The new concern was not over the
payment of the specified sum, as was the case in previous administrations over
taxation measures, but rather "about the possibility that a precedent would be
established in Latin America of intervention in their finances" (Philip,1982:222).
The companies therefore resisted, as they had always done, this time pleading
for an injunction on the union's demands. The Mexican government interpreted
the companies' protests as a refusal to comply. The STPRM followed with
instructions to the workers to cease work. The workers strike increased the
already tense relations between labor and management, and became more so
when the Mexican government insisted that wages should still be paid to the
workers while they remained away from their jobs. Furthermore, Cardenas
warned that if an agreement was not reached, the federal government would be
forced to intervene directly, placing the industry in Mexican hands. This threat,
although later denied by Cardenas, was not taken seriously by the oil
companies who "did not think that Mexico would dare to intervene or
expropriate" (Meyer, 1972:158).
The controversy reached a stalemate on the issue of the wage increase.
The representatives of the big companies, in meetings with Cardenas, agreed
to an increase of 20-million-pesos, and threatened to close down their
operations if forced to pay the 26-million-peso increase. This obstacle
prevented the two sides from reaching an agreement. The intransigence of the
oil companies in late 1937 and early 1938 towards the wage problem "did no
more than hasten the effective oil nationalization" (Philip, 1982:224). This is








precisely what prompted President Cardenas to expropriate seventeen
American and European oil corporations on March 18, 1938.


Summary
The dramatic step taken by Cardenas was the culmination of a
controversy that had resulted from a succession of events dating back to the
Porfirian era. Until the announcement of expropriation, the act which
transformed the Mexican oil industry from a foreign enclave to that of national
ownership, most of the official acts had been designed to regulate the industry
rather than steps toward nationalization (Powell, 1956:24). The constant
pressures placed upon foreign interests, against the backdrop of the rising
antagonism of the revolutionary leaders, were either resisted or ignored. The
C&rdenas administration finally took the decisive step to fulfill the social reform
provisions of the Constitution after the seeds had been sown in previous
administrations.

The oil companies' strategy of requesting the United States
government's intervention to resolve the conflict further heightened the
opposition in Mexico, as it was considered a threat to national sovereignty. In
the words of J. Richard Powell, "the expropriation was a consummation of the
reaction to the Porfirian free-for-all, open-door policy toward foreign capital, and
the more immediate objective of the expropriation was to assert once and for all
the supreme authority of Mexican law and legal procedures" (1956:25).
Perhaps most important to the future of the petroleum industry and part of
the focus of this paper is the shift in the formulation of oil policy that would
transpire as a result of its historical evolution. The attitudes which developed as
a result of the history of foreign domination of the petroleum industry laid the
foundation for a nationalistic oil policy. Since the reform-minded





32


administrations up to this time had been opposed to the exploitative export
policies of the foreigners, subsequent administrations set out to change the
structure of the industry. Their agenda became part of a move towards self-
sufficiency, and conservation of their newly acquired industry.















CHAPTER 3
FROM THE FORGING OF A NATIONAL OIL COMPANY TO THE OIL BOOM,
1938-1982: THE FIRST TRANSFORMATION

Introduction
The year 1938 marked a turning point in the history of Mexico. The
nationalization of Mexican oil was a transcendental event marking the
expulsion of foreign oil interests in the name of national sovereignty. The nearly
four decades of controversy between the oil companies and the Mexican
government accentuated this growth of nationalist sentiment. The
consequences resulting from the triumph over the foreign enclaves played a
large role in the determination of oil policy in the years that followed. The
deeply entrenched disregard for foreign domination exhibited by previous
administrations conditioned the conservationist policies of subsequent
administrations.

The expropriation itself did not arise from a deliberate, well-thought out
economic development plan in which the oil industry was designated a specific
role. Instead, "state control of the industry became a triumph of the revolution
with nationalist ideals of the revolution providing an overall policy umbrella"
(Durn, 1985:171). The policies which developed out of this particular history
however, soon provided Mexican presidents with the political and economic
vehicle to fulfill social reform provisions of the Constitution by the use of natural
resources finally under direct government control. Before these policies could
be implemented, the government had to come to grips with an industry that "was








pretty much a hodgepodge that needed extensive reorganization to form a
rational national system" (Powell, 1956:36). The oil industry prior to the

expropriation included up to 447 companies (Megateli, 1980:16-17), operating
more or less independently. Mexico thus faced a period of transition and
needed to coalesce this "hodgepodge" into an adequate and efficient
organization.


The Formation of the National Oil Company
The post-expropriation stage of the Mexican petroleum industry did not
begin without difficulties. The burden of taking control of an industry that had
been managed by foreigners for so long presented a host of new problems to
the Mexican government and the oil industry. As previously noted, wells dating
back to the Porfirio Diaz administration were literally depleted, and foreign
company investments had declined in the late 1930s, partly due to their
anticipation of the expropriation measure. The petroleum facilities required
extensive upgrading and repair parts. Additionally, existing refining and
transport facilities were designed to facilitate export requirements, as pipelines

led to Gulf ports rather than to the industrial urban centers in the interior. The
newly nationalized industry "was deformed and there were difficulties with

transportation equipment and a serious lack of refineries in a suitable condition
to supply the increasingly important domestic market" (Philip, 1982:320). The
country had obtained the basic infrastructure for the industry, but lacked the
modern technology that would guarantee continuous operations in the manner
envisioned by the Cardenas administration.

Management of the newly nationalized industry also posed difficulties for
Cardenas. The withdrawal of qualified foreign technicians and administrators at
the time of expropriation left a vacuum to be filled by a handful of technically








proficient Mexicans. The Mexican government, however, was not totally
unfamiliar with the operation of the industry. As early as 1933, Cardenas
formed a semi-private enterprise called Petr6leos de Mexico or Petromex to
obtain some control over the domestic market for oil. This organization was
charged with "fulfilling the government's oil needs, especially for the National
Railways, and ... training a technical staff to run the petroleum industry" (Durdn,
1985:174).

The inspiration to form this organization had come ten years prior to
nationalization. In 1928, Cardenas attended a speech by Mosconi, an
Argentine general, at the National University in Mexico, where the general
lashed out at the international oil companies, calling them "exploitative trusts."
According to Carl E. Solberg, Cardenas "espoused an ideology of petroleum
nationalism similar to that of the Argentine general" (Solberg, 1979:182). The
fortunate outcome of this inspiration was the creation of an institution devoted to
the training of technicians, a decision that would reap great benefits upon
nationalization of the oil companies.

Two other rulings, both of which were enacted at the time of the creation
of Petromex, also contributed to the preparedness of managers and technicians
who became the heirs of the nationalized industry. The Labor Law of 1931
required that at least 90 percent of the workers in any company should be
Mexicans. Equally important was the immigration ruling of 1933 which

specified that foreign technicians doing contractual work in Mexico were
required to train the locals to replace them. These decisions were important for
C&rdenas in the long term, as they provided for some expertise in overcoming
the initial obstacle of managing such a complex industry. Moreover, President
Cardenas benefitted from a smooth transition by silencing international
opposition, as well as domestic critics who deemed nationalization a failure for








Mexico. Cardenas was keenly aware of the many skeptics who accused
Mexico of acting strongly. To discredit the critics, "the government needed to
demonstrate that Mexicans could assume full responsibility for an entire
industry and thus make economic nationalism more than a political platitude"
(Mancke, 1979:77).
The workers' union, armed with the aforementioned experience, first took
charge of operating the industry by creating administrative councils (conseios
de administraci6n). These sections of the labor syndicate were organized
locally on a company basis. At the national level, the Mexican government
established an administrative council to supervise the operation of the industry
and to formulate plans for permanent organization. In an apparent response to
an earlier promise made by President Cardenas that the industry would be
turned over to the workers as he had done with the railways, STPRM took the
reins "with about the same administrative autonomy in technical matters as had
the managements of the foreign companies" (Lewis, 1959:164-5). The industry
took on a "commitment to syndicalism: that is, a belief that the workers
employed in the petroleum sector should have the right to operate it through
their labor organization" (Grayson, 1980:19).
Ironically, the same labor organization which played such a pivotal role
in the expropriation, now became immersed in conflict with the government it
assisted in that endeavor. The strains between labor and government evolved
as the locals began to take autonomous action in the management of their
companies as did their foreign predecessors. In the words of J. Richard Powell,
"it was this tradition of independent action which presaged ill for future
centralized control" (Powell, 1956:36).
This independent action was a direct result of the labor leaders'
demands for control and management of the industry. Cardenas, however,








departed from his earlier promise because the nationalized railway system's
service had declined since its placement under the control of the worker's
union. Cardenas feared that the same debilitating effects would befall the oil
industry, and thus formed Petr6leos Mexicanos (PEMEX) on June 7, 1938.
PEMEX was charged with managing the exploration, production, and refining
aspects of the industry. A second public corporation, the Distribuidora de
Petr61leos Mexicanos, was also formed by Cardenas to conduct the marketing of
petroleum and its derivatives. These public corporations, operated jointly by
labor and government, would fulfill Cardenas' contention that the "petroleum
industry operated for the benefit of all Mexicans, not simply the ones working in
it" (Grayson, 1980:20).
The formation of the two public corporations did not quell the conflict
between the Oil Workers' Union and the government. Between 1938 and 1946,
the union contested the following government-supported policies:
1. restructuring the industry on a nationwide basis, eliminating
duplication of functions carried out by the expropriated firms--e.g.,
advertising, sales, engineering, accounting, and medical services;
2. reorganizing the Oil Workers' Union to reflect the new structure of
the industry;
3. conferring upon PEMEX the right to appoint "confidential personnel"
to key positions;
4. authorizing PEMEX to eliminate positions it deemed unnecessary,
limit the number of permanent employees, and reduce the number
of temporary employees to no more than 10 percent of the
permanent work force;








5. holding the line on pay increases, reducing administrative salaries

to equitable levels, and limiting such benefits as allowances for
housing;
6. emphasizing merit over seniority in making promotions;
7. demanding greater efficiency and output from workers;
8. allowing management a free hand in reassigning workers to other

parts of the country (Powell, 1956:129).
Management of the industry by the two public corporations resulted in
increased expenditures due to duplication of effort, poor coordination, and
excessive hiring by locals. Bloating of the work force was evident as employees
increased from 15,895 in April, 1938 to 19,316 by January, 1940 (Grayson,
1980:20). As the local labor leaders "were enjoying a period of unsurpassed
prestige and power and were rapidly building vested interests in local control"
(Powell, 1956:40), the board of directors of PEMEX and the Distribuidora found
it difficult to bring local activities under control. It must be remembered that this
transpired at precisely the same time as production was falling and the
government was facing international pressures in the form of boycotts and
compensation disputes. Richard B. Mancke, in his book Mexican Oil and
Natural Gas: Political. Strategic, and Economic Implications, aptly summarizes
this initial hardship facing the Mexican government over control of the industry:

The resulting diffusion of responsibility led to the duplication
of effort and wasted expenditures. What was even more harmful
was that it proved impossible to control the power of the local labor
unions. By early 1940, the strains between PEMEX and the
Distribuidora, on the one hand, and between labor and
government agencies, on the other hand, were so debilitating that
President Cardenas ordered abolishment of the Distribuidora and
transferred its assets and functions to PEMEX. (Mancke, 1979:78)








With this action, President CArdenas designated PEMEX as the
controlling body of the Mexican petroleum industry. From this point forward,
PEMEX set out implanting its mark by coordinating the local labor councils and
making important structural changes as an organization of the government.
Several factors exacerbated the disputes which plagued labor-
government relations. In addition to the previously mentioned run-down state of
the industry, the government was required to pay an indemnity to the
expropriated companies, to pay salaries for a work force that had grown
precipitously since nationalization, and was also faced with a series of
international retaliatory acts which included economic boycotts. The prospects
for a smooth transition were not encouraging.
The struggle over expropriated property proved as difficult for the
Mexican government as the pre-expropriation conflict over control of the
industry. The affected oil companies, which had developed a trademark of
intransigence, adamantly refused to discuss a settlement with the Mexican
government. Instead, the oil companies relied upon a series of retaliatory acts
that were designed to pressure the Mexican government into reversing its

decree. In the words of Robert Engler, "the international oil companies began a
"'private war,' lasting many years, against the Mexican government by

boycotting Mexican crude oil and attempting to restrict access to petroleum
equipment and credit" (Engler, 1961:193-97). The loss of foreign markets
coupled with embargoes orchestrated by the oil companies on critical
petrochemical, technical and other material supplies disrupted Mexico's efforts
to forge a national oil company (Gentleman, 1984:76).
The State Department, having tacitly recognized Mexico's right under
international law to expropriate, took issue only with the amount and method of
compensation. The unwillingness of the companies to pursue an








accommodation with the Mexican government complicated the State
Department's efforts on this issue. To make matters worse, the Mexican
government and the State Department haggled simultaneously over the thorny
issue of compensation to American landowners whose property had also been
expropriated. All the while, President Cardenas expressed a willingness to
settle these issues, but to no avail. He contended that Mexico would not pay for
the subsoil oil, nor return the property. The diplomacy of the period which grew
out of the expropriation question thus became a very delicate series of
exchanges "complicated by the seemingly irreconcilable stands taken by the
two sides" (Cronon, 1960:230).
The general position of the oil companies is summarized in the words of
W. C. Farish, President of Standard Oil of New Jersey:

It is our opinion, as previously observed, that the only
possibility of a successful operation of the properties for the benefit
not only of Mexico but of the United States and all the parties
concerned is to reinstate company management under a long-
term contract which will give to Mexico and her people that
economic advantage which Mexico has sought. A settlement not
based on this principle would leave the matter in a worse position
than it is now. (Farish, August 27, 1941, cited in Cronon,
1960:263)
These words expressed the intention of the oil companies to return to the old
order of doing business in Mexico. Furthermore, their position implied that they
had not accepted the fact that Mexico could legally expropriate property. The
companies' views did not reflect the attitudes of the times either in Mexico or in
Washington. The two countries had finally come to terms on the agrarian
question in November, 1938, further weakening the oil companies' position of
hard-line tactics. It soon became apparent that the oil companies were more
concerned with whether their assets in other Latin American countries would
suffer the same fate than they were in reaching a settlement in Mexico.








Suffice it to say, all subsequent initiatives of the oil companies were
initiated with the purpose of seeking the return of oil properties in Mexico,
investing new capital, and preventing the setting of a precedent throughout
Latin America with respect to other company assets.
The State Department and the Roosevelt Administration soon became
impatient with the nonconformity of the oil barons. The initial loss of American
and British markets for Mexican oil, due to boycotts and embargoes, were soon
recouped by Mexico as a result of increased trade relations with Germany, Italy,
and Japan. Mexico's turn to the fascist bloc in the face of the oil companies'
retaliatory acts troubled the U.S. Administration, which feared an impending war
with these nations. Moreover, the Roosevelt administration "was committed--
ideologically and strategically--to fostering inter-American solidarity through its
Good Neighbor Policy" (Cronon, 1960:231). These factors did cause some
internal political realignments in Washington, favoring closer ties with the
Mexican government. In the words of Lorenzo Meyer, "Roosevelt did not
appear to be willing to sacrifice inter-American unity on the eve of a world
conflict for the return of the companies' property" (Meyer, 1972:187).

The dispute continued unresolved into President Avila Camacho's
administration despite a change of tune in Washington. The State Department,
by this time, declined to identify itself with the companies' position and instead
"took into account the different positions within the U.S. administration as well
as the world situation" (Meyer, 1972:185). With continued pressure from
Ambassador Daniels in Mexico, the Roosevelt administration and the State
Department became convinced that the time had come for the two governments
to work out a solution. This was particularly true since, with the outbreak of war,
navy strategists advocated the use of Mexican ports for strategic naval bases.








Josephus Daniels, as recorded in a letter to President Roosevelt, was keenly
aware of the importance of settling the oil dispute:

There is a general desire here that the negotiations reach a
satisfactory settlement of old controversies. The lion in the path
has been--it may be now--the greed of the oil companies. Mexico
will never return the subsoil to private companies. They ought to
be satisfied with fair payment of the real values. Doheny and
Cowdray took many millions from the oil fields for which they made
little return. The present owners ought to be paid, but up to now
they have not been very cooperative. Quite the contrary. I know
that you will not permit the more important matters to fail because
the oil companies insist upon the old status quo. It is as dead as
Julius Caesar. (Daniels, March 11,1941, cited in Cronon,
1960:259)
The eventual "global settlement," to borrow E. David Cronon's phrase,
came on November 19, 1941 when Secretary Hull and Ambassador Castillo
NAjera agreed to the compensation terms. The four year dispute had provided
many interesting lessons on the art of diplomacy, but more importantly for the
Mexican government, it surpassed critical hurdles in the early stages of the
nationalized industry. Furthermore, the constant machinations of the oil
companies in their efforts to return to past policies served as a reminder to the
Mexican government of the controversial history that led to expropriation.

Throughout the oil dispute, the management issue between labor and
the Mexican government loomed in the background. Hostilities continued to
plague the Cardenas administration precisely at a time when the industry was
beset with financial difficulties, economic embargoes, and the indemnity issue.
The political weapon of a strike, an act that would devastate the crippled
industry, became commonplace, as certain factions of the union were known "to
call for a strike and even to commit sabotage"(Silva Herzog, 1941:281). These
threats remained despite the designation of centralized control of the industry
under the tutelage of PEMEX.








With remarkable resiliency in the face of both internal and external
pressures, the Mexican government overcame an assortment of obstacles to
nationalization of the industry. The Cardenas administration coped with these
hurdles for three reasons: "the government as a matter of policy had long
required the oil companies to train Mexican personnel in the industry; second,
the government had actively participated in the industry; and third, the labor
syndicate and Mexicans in general received the announcement of the
expropriation with such enthusiasm and support as to contribute to success"
(Powell, 1956:34).

The expropriation and the events which preceded and followed it
certainly left an indelible mark on the development of the petroleum industry.
Most important with regard to policy formulation, the bullying and conniving of
the foreign oil companies during this period "convinced Mexican leaders as well
as the public at large that foreign capital should play an emphatically restricted
role in Mexico's emancipated petroleum sector" (Grayson, 1980:23).


Incorporation of Petroleum Nationalism
With the opposition effectively silenced, the industry set about making its
mark on Mexico. By this time, the dilemma facing the new management of
industry was the "enclave" character that it inherited in 1938, with its
predominantly export policy inclination. "The export orientation of the industry
was clearly felt to be unsatisfactory by the new management group that later
came to be known as PEMEX's 'Generation of '38'" (Gentleman, 1984:76), the
engineers, technicians, and managers of the state corporation. In response to
the historical legacy of the industry under foreign domination, the "'Generation
of '38' consistently advocated conservation of Mexico's national patrimony lest
output plummet again, as it did following the 1921 production peak, or the








industry once more would become the focus of foreign aspirations" (Grayson,
1980:22-23).
Allegiance to the ideals of the revolution conditioned the role of PEMEX
by devoting production to serving the public sector, as opposed to a profit-
seeking role. The initial aims of the industry included: furnishing subsidized
fuels to mines, farms, factories, villages, state agencies such as the railroads,
the military, and the state electric-power company (Grayson, 1980:23). This
principle generally guided Mexican presidents from 1938 through the mid-
1970s when the country experienced an unprecedented oil bonanza. It was
during this interim period that Mexico witnessed conscious attempts by
policymakers to ascribe to nationalist oil policies.
The election of General Manuel Avila Camacho as President in 1940
ushered in a new era of political change in Mexico. Mexican politics during the
1940s presented a sharp contrast to the radicalism of the preceding decade.
Avila Camacho's election represented a move to the right when contrasted with
the radical government of CArdenas which brought about the 1938 oil
nationalization. Beginning with his reference to inter-American solidarity in his

inaugural address, Avila Camacho's administration reflected a more
cooperative phase in relations between the United States and Mexico. The two
nations, despite a history of hostile relations, came to terms on important
defense and economic issues.
In 1941, Assistant Secretary of State Sumner Welles and Castillo Najera
signed an agreement granting both nations the right of transit and the use of
airfields for military aircraft. The United States also contracted to buy eleven
strategic minerals from Mexico, a surprising move considering that the oil
dispute over compensation remained unresolved. Additionally, Ambassador
Daniels reported to the United States government that Mexico was cooperating








in the American Embassy's efforts to disrupt German subversive activities in
Mexico. The most telling sign of Mexico's attempts at rapprochement with the
United States came with Avila Camacho's announcement that "Mexico would
go to war if the United States were attacked" (Cronon, 1960:260).
The dispute between the Mexican government and the oil companies, as
previously described, was also settled during the Avila Camacho
administration. His policies with respect to the industry were naturally
influenced by the political change of direction; however, "he was more
concerned to balance rival pressures than to take a pronounced position of his
own and so reversal of policy was muted" (Philip, 1982:330). The passage of
the petroleum law of 1941 by presidential order on December 16, 1941
exemplifies this point.

The basic law asserted the "inalienable" ownership rights of the state
over all petroleum deposits, and also declared the industry a "public utility."
These declarations obviously denoted the strong influence of nationalist dogma
from the pre-expropriation era. Further solidifying government control over the
industry was the detailed regulation stating that the industry was subject to
exclusive federal jurisdiction, including the levying of taxes. Exploration and
production of oil was permitted by only three types of agencies: "(1) direct
dependencies of the government, (2) government corporations created by law
for that purpose, and (3) private interests on a contractual basis under certain
circumstances" (Powell, 1956:44-45). Furthermore, with regard to contracts,
authorization could only be granted to Mexican nations, companies of Mexican
nationals, or to companies of "mixed capital" in which the Mexican government
held a majority of the controlling stock (Powell, 1956:45).
The aspect of the law which indicated that Mexico might be willing to
allow the return of foreign investment into the oil industry was its provision "for








joint ventures between the Mexican state and foreign capital in oil exploration,
provided that the state took 51% of any partnership" (Philip, 1982:74). In this
matter, it can be seen that Avila Camacho was an astute politician. Even
though he was committed to earlier political openings with the United States, he
realized that severe political repercussions would erupt if such measures
evolved. In the words of E. David Cronon, "President Avila Camacho feared to
break with the Cardenistas" (Cronon, 1960:266). The "'.vilacamachista"
administration found itself unable to pursue an inclination towards foreign
investment in the petroleum industry as the left, including CArdenas, "were able
to block any real reversal of policy" (Alemin Vald6s, 1977:491).

The threat of a political backlash obviously influenced the laws regulating
petroleum development after expropriation. The left adamantly contested any
policy initiatives which directly threatened their nationalistic position. The
political ramifications of pursuing such measures were best expressed in the
words:

Uncertainty in the law and hostility among labor groups
created serious obstacles to participation in the industry by foreign
capital. The law limited the ownership of petroleum deposits to the
nation itself, and exploration for and exploitation of oil deposits
were hedged around with many restrictions which laid a haze of
illegality over foreign participation in oil development. Labor
groups sought to maintain the nebulous legality because they
opposed anything even remotely resembling foreign economic
imperialism. It is likely that domestic capital, at least tacitly,
supported labor in this hostility because Mexican capitalists
opposed foreign competition. (Powell, 1956:50)

Due to the likely political consequences of a foreign oriented oil policy,
PEMEX under President Avila Camacho occupied itself with infrastructure
projects and with reorganization efforts begun under Cardenas. One important
project which entailed foreign involvement was the U. S. $10 million loan








obtained from the Export-Import bank in 1943. The loan was earmarked for a
refinery at Atzcapotzalco for the purpose of improving Mexico's capability to
supply the domestic market. This was in line with the expressed goals of
nationalist oil policy.
The most problematic issue facing Efrain Buenrostro, PEMEX Director
General for Avila Camacho, was the restoration of harmony between PEMEX
and the STPRM. Tensions were high during this administration over wage
scales, hiring and firing practices, and general workers' benefits. In the face of
union strikes and unrest spurred on by spiralling inflation, Avila Camacho
instructed PEMEX to award an increase in wages. "The result was that the
portion of PEMEX's budget devoted to compensation shot up from 90 million
pesos in 1943 to 123 million in 1944" (Grayson, 1980:21), an extremely
burdensome increase for the industry. Moreover, the government granted the
union greater autonomy in filling vacancies, and awarded workers better
holiday pay and a forty-four hour work week. These compromises ushered in a
short-lived period of calm, before the petroleum workers' union once again
emerged as a player on the national political scene during the next
administration.
On 1 December 1946, Miguel Alem&n Valdes, the first civilian president
since the Mexican Revolution, took over the presidency from General Avila
Camacho. His victory "spelled the demise of what socialist programs still
survived from Cardenism" (Zoraida Vazquez and Meyer, 1985:164). Alemn
embraced the same political change to the right as his predecessor. His
inclination towards better cooperation with the United States and his staunchly
pro-Washington stance on Cold War issues was highlighted by the symbolic
first visit of an American president to Mexico in March, 1947. President Harry S.
Truman's visit was presumed to presage "a new era of cooperation in Mexican-








American relations ushered in by World War II" (Castafieda, 1988:23).
Nevertheless, the undoubtedly nationalist flavor of the nation's petroleum
policy, outlined in the law of 1941, "did not change significantly despite
Alemin's sympathy for the United States" (Philip, 1982:330).

President Alemrn's right hand man in oil matters, Director General
Antonio J. BermOdez, became perhaps the most influential individual in energy
matters in the industry's history. The fact that Bermudez had served twelve
years as Director General, longer than any other director, was representative of
his ability to persevere during trying times for the industry. Bermodez
developed a reputation for honesty while amassing a fortune as a businessman
and by cleaning up a corrupt Ciudad Juirez as its mayor. Alemin viewed
Bermudez as the likely choice for the job of taming union opposition and setting
the ailing industry into motion.
The businessman-turned-politician was a "key figure in persuading
Aleman not to make major changes" (Philip, 1982:330) to the law governing oil
policy. Aleman was keenly aware of the necessity for holding the line on
foreign investment in the oil industry, when he said that the Mexican petroleum
law (which could not be changed because of political consequences which
would follow any tampering with it) made it impossible for any other than
Mexican companies to operate in Mexico except under such contractual terms
as were contemplated (Miguel Aleman cited in Philip, 1982:330).

His position was further influenced by the long-standing problem
between labor and management. While his predecessor's inclination was to
reach a compromise with labor syndicate leaders, Aleman resorted to "using
and refining the mechanisms of authoritarian political control to keep the
demands of labor to a minimum" (Zoraida VAzquez and Meyer, 1985:164). In
reaction to illegal union activities, Alem.n mobilized the armed forces to break








up striking oil workers, claiming that "it was his duty to maintain order in

accordance with the law, to protect the institutions of the country, and to prevent
individuals or groups from undermining the constitutional regime" (Powell,
1956:148).

The stormy relationship between labor and the administration served as
a deterrent to any change in policy. These circumstances made it clear that
AlemAn did not wish to add to his problems by inviting foreign investment back
into oil. Instead, Aleman and BermOdez joined forces to maintain order in the
industry with two objectives in mind, the reduction of trade union power and the
strengthening of managerial control. The two leaders found it necessary to play
the nationalist card in order to deter radical, left-wing opposition within the
union ranks.
First on the agenda for this administration was negotiation of an
agreement with labor leaders who Bermudez claimed were threatening the
well-being of the industry. The following list of grievances was the preface on
which Bermudez based his contention:
1. the financial crisis faced by PEMEX resulted from its heavy

responsibilities under the existing labor contract. The work contract
caused expenses to exceed revenues;
2. this disequilibrium prevented the organization from meeting its

obligations and paying indemnification claims;
3. financial imbalance prevented the industry from carrying out

necessary exploration and refinery expansion;
4. an excess of personnel, due to vested interests in the syndicate,

weighed heavily upon the industry and the country;
5. extreme disorder in the system of job classification was an obstacle

to efficient development of the industry;








6. the syndicate had wrested from the administration powers

necessary for a program of conservation, maintenance, and

development;
7. the effectiveness of management was reduced by the contractual

requirement that certain classes of confidential employees needed
for administration and supervision be chosen from syndicate
personnel (Powell, 1956:147).
Bermudez, with Alemrn's backing, acted swiftly by firing fifty syndicate
leaders, including the entire executive committee, after an STPRM-initiated
strike in December, 1946. The strike was precipitated by the syndicate's eight
year attempt to obtain an average salary of twenty-four pesos a day,
approximately ten to twelve times the national rate. The petroleum workers'
strategy of eliciting support for the wage increase by claiming "hero status" in
the "battle against imperialism" backfired, as resentment spread to other
powerful elements of organized labor and public opinion was generally
"disgusted with the odorous conditions of their national oil industry" (Cline,
1965:253). The two year accord, resulting from Bermudez' efforts to resuscitate
the industry, gained PEMEX more autonomy in trimming the workforce,
transferring workers, and contracting with private firms. The last item "ended the
STPRM's exclusive right to serve as contractor for pipelines, refineries, offshore
drilling, roads, schools, or any other project" (Grayson, 1980:25), which up to

this point had given impetus to corruption by syndicate leaders who would line
their pockets through the practice of hiring confidants. What is most interesting
with regards to the elimination of this contracting privilege is that it somehow
slipped back into the purview of the oil union. Although a definite date cannot
be established, it would appear that official tolerance of the union by future
president L6pez Mateos might have facilitated its return.








Under the same agreement, the STPRM managed to gain an acceptable
wage increase, thus allowing the administration to concentrate on issues
directly related to the acceleration of the industrialization process instituted
under Aleman's predecessor. "PEMEX came to be seen as one, indeed the
most important, of the many state enterprises which had been entrusted by
Alemdn with the task of providing the infrastructure and inputs to aid the import-
substituting industrialization with which Aleman's presidency was most closely
associated" (Philip, 1982:335).
His first priority was the manufacturing of goods that would serve as a
substitute for foreign imports. The industry would serve as the adjunct to this
import-substitution-industrialization plan by fulfilling the nations' energy
requirements at low cost. In the words of Antonio J. BermOdez, "the economic
course that nationalization had given the industry meant development of all of
its branches with the aim of keeping its production well ahead of national
demand" (Bermudez, 1963:41). With this goal in mind, Bermudez instituted the
most extensive exploration program since 1930. Petr6leos Mexicanos drilled
only 38 exploratory wells between 1938-1946, but during Bermidez' first term
as Director General (1946-1952) a total of 758 wells were drilled. Additionally,

the number of developmental wells increased from 221 to to 2,478 (Grayson,
1980:26).
Bermudez' most important achievement, with direct connections to
supplying the domestic market, was the pioneering of the natural gas industry.
The Director General noticed the need to capture this vital source of energy
which, to this point had to be "flared" because the nation lacked the structural
system necessary to transport it to urban areas for industrial use. Of the many
valuable uses for natural gas, the following three critical purposes stood out in
Bermudez' objectives: (1) to use dry gas to generate heat for industrial and








household use; (2) to generate thermal-electric power and; (3) as a raw
material in the petrochemical industry (Bermtdez, 1963:91). Ironically, one
advantage gained by the development of natural gas use was that it eventually
freed up excess fuel for exports, an undertaking which contradicted this period's
policy initiatives.
The structural changes instituted by Aleman's administration weighed
heavily on the PEMEX budget. In 1947, the industry failed to publish a financial
balance sheet of its annual operations. It soon became apparent that the
administration would be forced to tread the politically sensitive line of foreign
capital involvement. Alemin's official export policy stipulated that only surplus
oil could be exported. The driving force behind this policy was PEMEX's main
objective of adequately supplying the national market. This market had
witnessed an eightfold increase in per capital consumption between 1940 and
1947 (Grayson, 1980:27). Naturally, a modification of policy would have been
necessary to attract a limited amount of foreign capital without disturbing the
nationalist constituency which called for low-cost oil supplies to Mexican
industry.

Nevertheless, the restrictive export policy was not significantly modified
despite an increase in oil exports for the years 1950 and 1951. This increase
was attributed to a rise in surplus crude as a result of Bermudez's drilling
program. The decline in 1952, although partially influenced by an international
surplus, returned Mexico to its consistent levels. The combination of low-cost
subsidies to industry and general prohibition of exports left the administration
with little freedom to maneuver. The unsatisfactory financial position of PEMEX
forced Aleman to levy a modest but controversial increase in domestic oil
prices. Equally controversial was the $30 million loan PEMEX was able to
negotiate from private sources in the United States. This loan was the first








PEMEX was able to obtain since the conclusion of the indemnity controversy, a

period in which United States government policy forbade loans to PEMEX.
In 1949, in an effort to complement Mexican oil exploration, the Alemin
administration signed a series of risk contracts with small United States oil firms.
These contracts indirectly allowed foreigners to reenter the oil sector to assist in
the drilling of new wells. The companies would only receive payment for
productive wells, but were not entitled to any oil found. "To circumvent the legal
prohibition on oil exploitation by foreign interests, PEMEX agreed to supervise
carefully each contractor's work and take charge of all completed wells"
(BermOdez, 1963:32). Again, Alemin came under sharp criticism for allowing
foreign capital into the oil sector. This attack on the administration, spurred on
by the entrance of U.S. capital into an area of the economy "particularly
sensitive to the influence of Mexican nationalism" (Zoraida Vazquez and Meyer,
1985:165), caused the eventual cancellation of the contracts by the Mexican
government.
President Alemin's hand-picked successor, Adolfo Ruiz Cortines, was
elected in 1952. His administration saw the continuation of the same pattern of
activity in the oil industry as his predecessor. He adamantly supported the
policy of low prices and energy subsidies to other areas of the economy. The
policy of exporting surplus petroleum was also not explicitly modified. In fact,
Ruiz Cortines was opposed to unrestricted exporting. His adherence to the
conservationist dogma of the period was reflected in Bermudez' 1953
"Director's Report" which mentioned, for the first time, that "PEMEX was
maintaining as a matter of policy a 20-year reserve-production ratio" (Philip,
1982:337).

BermOdez, serving his second term as Director General, found his
modernization efforts hindered by the administration's policy of self-sufficiency








and limited exports. Furthermore, the financial impact from the previous
administration was being felt as "AlemAn had spent public monies with so much
abandon that a policy of economic retrenchment was unavoidable" (Grayson,
1980:30). Despite these factors, substantial progress was made in the
industry's refining capacity and in the natural gas industry. PEMEX completed
construction of three refineries during this period, raising the number of
operating facilities to eight. Considering that private firms had constructed five
refineries before 1938, Mexico's erection of three facilities in such a short period
is a testimonial to their aggressive determination to build a modern, progressive
industry. In 1947, PEMEX could refine 153,000 bpd, but by the end of 1958, its
capacity had more than doubled to 328,000 bpd (Bermudez, 1963:66).
The potential to handle a greater volume of natural gas was made
possible by the construction of three processing plants and 977 miles of gas
pipelines to transport the fuel to urban areas. The first "gasoducto" completed in
1950 connected Mexico City with the source of this vital energy source some
162 miles away. The second pipeline, completed in 1958, extended to the
northern reaches of the nation, providing year-round gas supplies to Mexico's
industrial center. A third gas line measuring 663 miles was in the process of
construction when Bermudez' second term in office came to a close.
In addition to the positive impact that natural gas provided the
administration's policy of industrialization, it played a secondary role in the
development of related industries. Private manufacturers sprang up to produce
the pipe, gauges, compressors, and other related items necessary for the
construction of pipelines. By 1958, PEMEX obtained half its required materials
from Mexican industry, while in 1947 imports accounted for virtually all supplies
(Hickey, 1960:73).








Perhaps the most difficult situation facing Ruiz Cortines and his Director
General was that the modernization efforts of the industry were becoming
increasingly expensive. The opportunity to earn substantial foreign exchange

by a policy of exporting was literally closed by the administration's own policy of
minimal exports. Its central function was relegated to producing and selling oil

at anemic prices to domestic industries. The financial difficulties were
compounded by the resumption of hiring practices by PEMEX management.
After Bermudez' conscious effort to trim the work force under AlemAn, the
number of employees increased from 28,822 in 1947 to 45,532 in 1958
(Petr6leos Mexicanos, Anuario estadistico, 1978:14). Efforts to tackle this
financial hardship, which included the export of natural gas to the United States,
were met with stiff resistance from nationalists who continually advocated the
conservation of Mexican resources for domestic consumption.
In true political form, Ruiz Cortines took the necessary step to increase
domestic oil prices in his last days in office. To counter this politically sensitive
move, he appeased the nationalists by amending Article 27 of the Constitution
to prevent foreign penetration of the oil sector via the aforementioned risk

contracts. This was the new Regulatory Law which completed the
nationalization of oil resources, and confirmed the government's position

previously embodied in the 1941 Petroleum Law (no longer in effect). The 1941
Law did not fully delineate the boundaries between the state and private
enterprise with respect to exploiting oil resources, although the latter was
confined to Mexicans or to contractual arrangements where the government
retained majority control. The new law however, clearly stated that only the
nation could exploit oil resources.
Equally important was this law's treatment of the petrochemical industry.
This industry, pioneered by BermOdez, had long been the subject of a behind








the scenes struggle between the state and private capital. Private enterprise,
both Mexican and foreign, desired this branch of the petroleum industry to be
free of state control. Nevertheless, the legal mandate ascribed the basic
petrochemical industry to the state to fulfill the government's policy of
"incorporating all facets of the industry in the service of the nation's collective
interest" (Bermudez, 1963:37). This legislation, marking Bermddez' last act as
Director General, was finally passed by Congress during Adolfo L6pez Mateos'
first year as president.
By 1958, the mold was set for the function that PEMEX would take on as
a state institution. After successive administrations had used the petroleum
industry to promote industrialization with the provision of cheap oil, PEMEX
steered a more normal path. The years between 1958 and 1974 saw fewer
departures from nationalistic policy. All initiatives which threatened political
fallout were quickly dropped under the pressure of nationalist attack. In fact,
during this period there was a conscious effort by both the president and
director general to put PEMEX's finances in order.
Upon assuming office in 1958, Adolfo L6pez Mateos appointed Pascual
Gutidrrez Roldan as director general of PEMEX. Roldan was a trained
economist and banker who held a host of critical government appointments,
including a post in the Department of Treasury and the director of the national
steel industry. The Director General's credentials were well-suited to the
administration's priority of balancing PEMEX's finances. After Roldin's
appointment, L6pez Mateos' first act was to put PEMEX, the Federal Energy
Commission, the state steel industry, and other agencies under the jurisdiction
of a newly formed ministry: National Patrimony. This ministry was charged with
coordinating the development of the nation's natural resources.








PEMEX was on the brink of bankruptcy in 1958. Roldan began by
trimming the more than 45,000 member workforce. His intention was to cut the
$100 million payroll by $20 million. He began a widely publicized campaign
against waste, inefficiency, and corrupt labor practices, which combined were
draining PEMEX's budget with unnecessary public expenditures. The
seemingly endless allegations directed toward the STPRM leadership included
the selling of jobs, vendeolazas, wrongful estimates on contracts, and collusion
with private firms. The most consequential method of curbing these practices
was the dismissal of a number of political appointees. This was not completely
effective since corruption was so widespread.
President L6pez Mateos' close political ties with the head of the STPRM,
Joaqufn Hernandez Galicia, seemed to explain the administration's hesitation
to be more vigorous in changing these labor practices. Hernandez Galicia,
known as "La Quina," had backed the election campaign for the new president
and kept the workers passive throughout his administration. In exchange for
this political loyalty, L6pez Mateos supported the union leader, who would later
obtain unprecedented power as a strongman in labor activities in the 1970s.
According to George Philip, "there was a price to be paid for official tolerance of
a union structure which was efficient at preventing disruption, but also
increasingly corrupt and willing to resort to illegal measures" (Philip, 1982:340).
The price, of course, was the continued practice of union leaders enriching
themselves at the expense of PEMEX investment capital.
Meanwhile, strides were being made at improving the industry's financial
position by seeking long term foreign loans. Private American banks provided
two loans amounting to $90 million for the completion of the gas pipeline begun
under the Ruiz Cortines administration. These loans were backed by a
determined amount of natural gas exports. Additionally, PEMEX was granted a








$100 million loan by the French government for the expansion of the
petrochemical industry. Naturally, granting PEMEX permission to contract loans
from foreign sources precipitated controversy for the government as "Mexican
nationalists and Communists were highly critical of these loans and accused
the oil industry of selling out to foreigners" (BermOdez, 1963:12). Although the
publicity campaign against the unscrupulous labor practices may have been
more political rhetoric than a genuine crackdown, these loans were legitimate
manifestations of an industry in trouble. If anything, the policies advocated by
the nationalists of granting cheap fuel to Mexican industry, limiting exports, and
allowing the union liberal hiring powers, in essence prompted the government
to secure loans as the only viable solution to making ends meet.
As a government corporation in the eyes of the law, PEMEX was a
decentralized agency of the government; as such it had to pay taxes as did
private corporations. Getting PEMEX on stabler financial grounds was L6pez
Mateos' rationale for excusing the firm from tax payments. The following year,
the president converted PEMEX's outstanding debt to the state into 99-year, 8%
bonds. In 1960, PEMEX began paying a single tax of 12 percent of its annual
income to the federal treasury (Petr6leos Mexicanos, Informe del Director
General, 1960:12-14). Roldin's shrewd, business-like management practices
paid dividends as revenues grew 23 percent his first year, debt fell from 3,839 to
3,110 million pesos during his six years, and the first annual financial statement
since 1947 reappeared (Grayson, 1980:36).

While Roldan's tenure as director general appeared to have been
focused on the firm's finances, infrastructural progress was also made with the
help of increased revenues. The pipeline system greatly expanded PEMEX's
capability to supply Mexico's urban areas. Drilling of wells increased; however,
the preponderance of wells were developmental rather than exploratory.








Criticism surfaced as reserves were slowly depleted by demand. The new
justification for less exploration dated back to the government's policy of limited
exports. The argument can also be made that during the L6pez Mateos
administration, the oversupply of oil in the international market mitigated against
prioritizing exploratory activities. De-emphasis on exploration during this period
was also hampered by the initial lack of financial resources. Suffice it to say,
failure to continue exploration drilling caused depletion of reserves and
eventually led Mexico to become an oil importing nation in 1968.

Roldan pursued the development of the petrochemical industry with
much enthusiasm, particularly because of its appeal to foreign investors and its
potential fiscal value to PEMEX. In the words of F. J. Bullard, "a turning point in
the financial position of PEMEX was Mexico's nascent petrochemical industry's
attractiveness to investment capital" (Bullard, 1968:124). The industry was also
"favoured by the technocrats of PEMEX because this branch was free from the
labor constraints of oil production" (Philip, 1982:344).

The extensive work accomplished in petrochemicals did not transpire
without a wave of criticism. Roldan tinkered with the legal mandate reserving
production in this sector to PEMEX by attempting to conclude contracts with
foreign companies. This reconsideration of policy was short-lived, as nationalist
opposition charged the administration with "attempting to deliver the basic
petrochemical industry to private interests, including foreigners" (Bermodez,
1976:71). Joint ventures with Dow Chemical and DuPont were subsequently
cancelled during the presidency of Diaz Ordaz.

The incoming presidency of Gustavo Diaz Ordaz was a marked contrast
from the previous administration in the arena of petroleum politics. Diaz Ordaz'
selection of Jesus Reyes Heroles (a lawyer and politician) as director general,
returned PEMEX to its historical roots of strident nationalism. Reyes Heroles








was a nationalist politician cast in the mold of the technocrats of the "Generation
of '38." As a loyal disciple of the Mexican Revolution, Reyes Heroles shaped
oil policy to reflect a public-service role for PEMEX, self-sufficiency, and
adherence to a conservationist doctrine. Consistent with this outlook, Reyes
Heroles opposed importing crude oil, as it would put his nation's destiny under
the influence of foreigners. Likewise, to export large quantities would represent

a return to the "feverish over-exploitation" of the 1921-1924 period.

The Director General's firm devotion to self-sufficiency was evident in his
commitment to exploratory drilling. As previously mentioned, the L6pez Mateos
administration handicapped the industry's ability to meet domestic energy
demand by placing a low priority on exploration. Despite the increase from 15.2
to 30.1 percent of exploratory wells drilled (Grayson, 1980:40), crude production
failed to keep pace with internal demand. The long time lag required for the
proper development of exploration operations proved too great to overcome the
immediate needs of the nation. The ultimate irony is that in 1968, during the
tenure of one of the most fervent nationalist directors of PEMEX, Mexico was
consigned to the status of an oil importing nation.

Despite this setback, Reyes Heroles proceeded to implement his
revolutionary-inspired task of undoing the work of Roldan. It was during Diaz

Ordaz' "sexenio," under Reyes Heroles' advisement, that the risk contracts of
the last decade were finally terminated. PEMEX made prompt payment to the
affected American companies to avoid the return to unnecessary conflict similar
to that of the post expropriation period. Further acts along these lines included
the elimination of twenty-two agreements concluded during the L6pez Mateos
administration that allowed independent producers to drill for oil. Additionally,
PEMEX took complete control of basic petrochemicals, leaving little doubt that
Rolddn's forays with foreign investors were a thing of the past.








Perhaps one of the most enduring problems facing Reyes Heroles was
the ever-increasing corruption of the labor union. He was cognizant of the fact
that if corruption was left unchecked, PEMEX would proceed on a course of
rampant inefficiency. His intense clean-up campaign, focused on the selling of
jobs to workers by district labor leaders, led to the eventual resignation of
HernAndez Galicia and other notable patrons of this strongman. Nevertheless,
HernAndez Galicia's pervasive influence on the system prevented any real
advances in the curbing of corrupt practices. At the conclusion of the Diaz
Ordaz and Reyes Heroles term, "La Quina" re-emerged on the labor scene.
The creation of the Mexican Petroleum Institute (Instituto Mexicano del
Petr6leo-IMP) by Reyes Heroles was a significant accomplishment along the
lines of his nationalist program. This research and development organization
was designed to improve Mexico's technical capabilities at both the technical
expert and worker level. The institute's growing international reputation and the
training of a professionally competent workforce, obviated the need for foreign
contracted experts. The organization was, therefore, not only a success in the
nationalist sense, but also in the realm of modernizing the state monopoly with
the latest advances in technology and engineering.
True to historical precedent, this director general was no different in
contributing to the expansion of the workforce. Despite initial efforts by both
Bermudez and Roldan at trimming employees, the ultimate outcome was similar
to that of previous administrations. Reyes Heroles was no exception. By using
the industry as a source of patronage, the firm witnessed a 33 percent
expansion in personnel between 1965 (53,973) and 1970 (71,062) (Grayson,
1980:46).
In summary, the petroleum industry since nationalization was oriented
towards Mexico's internal needs. Successive administrations clung to a








conservationist doctrine influenced by nationalist opponents who were not
quick to forget the export policies emphasized by foreign oil companies prior to
1938. The only possible exception to this general policy direction was the
Gutidrrez Roldan period, which flirted with politically sensitive dealings with
foreign firms. However, the subsequent appearance of Reyes Heroles brought
a return to PEMEX's revolutionary path.

The confluence of several factors, including financial insolvency, a lack of
exploratory drilling during the L6pez Mateos administration, and an
unprecedented increase in domestic consumption, consigned Mexico to the
status of an oil importing nation in 1968. It was under this stigma that the next
administration would take the reins. What followed this period of PEMEX's
evolution was the introduction of policies that would contribute to the most
dramatic transformation in the oil industry since the expropriation.


The Roots of PEMEX's Transformation
When the administration of Gustavo Diaz Ordaz came to a close in
December 1970, Luis Echeverria Alvarez inherited a host of problems that had
begun to take their toll on the political system. The most damaging on the list
was the traumatic massacre of university students at Tlatelolco in 1968. This
repressive act of Mexican authoritarianism was a watershed event in the
erosion of the regime's political legitimacy. The heightened opposition from
important segments of the middle class and to a lesser degree, urban workers
and peasants, began to erode the legitimacy of the ruling one-party system, the
Partido Revolucionario Institucional (PRI). This crisis also initiated mass public
protests directed at other divisive issues, including maldistribution of income,
unemployment and underemployment, stagnating agricultural production, and
the high rate of migration from rural to urban areas. Much criticism emerged,








particularly from the left, of the stabilizing development model pursued up to this
point, which had abandoned traditional populist programs in favor of economic
growth through industrialization. The serious political ramifications of the 1968
crisis were best put into perspective by Kevin J. Middlebrook: "most of these
problems were not new, and in some cases they took on important dimensions
only after the 1968 crisis in public confidence" (Middlebrook, 1986:78).

President Echeverria, who served as Secretary of Government during the
"massacre," was well aware that the state's response to the strike violated

acceptable government behavior and required an immediate remedy. The new
program that emerged under the rubric of "shared development," favored
redistributing income, increased spending on social welfare measures, and
emphasized small and ejidal agriculture. Additionally, the state sought to
stimulate economic growth by increasing investments in agriculture, energy ,
and heavy industrial and capital goods. The reformist program adopted by
Echeverria was thus designed as a response to urgent political concerns. His
administration found it "politically wise to break with the past administration"
(Grindle, 1977:74), in order to restore confidence in the regime.

Consistent with this policy direction, Echeverria increased federal
government expenditures to PEMEX. The subsidies were geared toward the
established policy of reducing energy prices of oil and fuel for domestic use
(Looney, 1985:59); however, the magnitude of the subsidies reflected the
ambitious scope of the government's efforts. Echeverria likened the role of
petroleum to a "vigorous column" of the economy that would allow Mexico to
achieve economic independence (Megateli, 1980:39). The government
announced an eighteen billion peso investment plan designed to locate new
reserves, raise oil and gas production 8 percent annually, attain self-sufficiency
in petroleum, and quadruple the output of petrochemicals (Grayson, 1980:47).








The subsequent discovery of vast quantities of oil in the Chiapas and Tabasco
areas in 1972 marked a dramatic turn of events for the industry.
Mexico continued to import crude oil at the rate of 33,884 barrels per day
in early 1974, but by the year's end, the daily export rate had reached 60,000
barrels per day, thus changing Mexico's status as a net importer to one of a net
exporter of oil. Additionally, total annual production of 238.3 million barrels for

that same year enabled Mexico to exceed, for the first time, the 1921 production
level (Velasco-S., 1983:59). The surprising aspect of the newly found oil
wealth, and one of the great unanswered questions is that President Echeverria
refrained from using the oil card while immersed in a major crisis. The most
likely reason for holding back is that he had lost control of the political crisis.
The combined pressures from the old guard conservationists and the business
sector opponents of shared development, may have muted any radical changes
in export policy.

What appeared to be a timely blessing for the regime's quest for "shared
development" soon became the center of debate amongst the PEMEX
technocracy. Conservative elements within the firm were reluctant to make
public the true potential of the newly discovered oil fields. Their nationalistic

bent imposed strict husbandry of reserves for future generations. The other
faction, composed of younger technocrats, pressed for further investment in
exploration as they considered the exploitation and export of petroleum to be a
profitable venture. The latter viewpoint, adopted by L6pez Portillo in the next
administration, gained strength during the Echeverria sexenium. The debate
and speculation produced by these discoveries, unbeknownst to its participants,
ironically became the historical antecedent to a much wider issue, oil resource
exploitation which catalyzed a major transformation of the industry.








The government's ambitious investment program in the public sector did
not achieve any of its objectives. The combination of declining export rates and
heavily increasing import rates, forced the state to rely on foreign borrowing.
During the six years of "shared development," "the foreign debt grew in U.S.
dollars from $4.5 billion to $19.6 billion, while the public deficit rose in Mexican
pesos from 4.8 billion to 42 billion between 1971 and 1975" (Teichman,
1988:49). A variety of international factors contributed to the failure of "shared
development": the reduction of Mexican exports as a result of President Nixon's
ten percent surcharge on imports, the decline of American tourism, the 1972
world food crisis, and the 1973 oil shock. To make matters worse, the populist
themes of economic reform alienated the business class, which precipitated
disastrous levels of capital flight, thus generating continued borrowing to curb
the deficit.
Concomitant with the failure of "shared development," the growth of the
petroleum industry during Echeverria's term proved a mixed blessing. The
newly found oil weath was overshadowed by the fact that by 1975 almost 50
percent of government expenditures went to state enterprises, with PEMEX
receiving the larger share (Teichman, 1988:48-49). Additionally, PEMEX's
difficulty in supplying the domestic market in the early 1970s was exacerbated
by the 1973 world oil shortage, leading to further oil imports. These factors
accentuated Mexico's problem of a negative balance of payments, since
revenues obtained through exports and loans were tied to public deficit
shortfalls. To make financial matters worse, Director General Dovali Jaime
capitulated to union demands for a larger workforce. The number of PEMEX
employees increased by over 30 percent, from 71,737 in 1970 to 94,501 in
1976 (Grayson, 1980:49), further aggravating the strain on the federal budget.








Nevertheless, the decision to push development of the petroleum
industry set the stage for a new era. The increased emphasis on exploration
and production during this period gave birth to a new strategy to confront the
failures of "shared development." This strategy brought about a fundamental
change in the role of PEMEX, from that of a state industry supplying domestic
fuel needs to one of prime mover in national economic decisionmaking.
Beyond the economic realm, PEMEX's importance also spawned a
transformation in the role of political actors at the national level.


The Transformation of Mexican Petroleum
When President L6pez Portillo came to power in 1976, the state's
maneuverability had become increasingly restricted as a result of the previous
administration's external dependence on foreign capital, which further
exacerbated an array of serious economic and social problems. With the failure
of the shared development program, President Echeverria had also
"precipitated one of the deepest political crises in modern Mexican history"

(Sanderson, 1986:40). Mexico's foreign debt had reached the historically high
figure of $20 billion (Looney, 1985:70), and the nation's capacity to repay
seemed nonexistent. For L6pez Portillo, the "oil card" appeared to be one of the
few options he still possessed to find a solution to Mexico's problems.

L6pez Portillo envisioned two political priorities at the beginning of his
administration: the restoration of the business community's confidence in
government, and increased support for the regime by the popular classes. He
adopted the strategy of rapid exploitation and export of petroleum to achieve his
two objectives. The export strategy marked an important change in the role of
petroleum in the national economy--from export enclave to industrializing
impetus--now to the panacea of the Mexican economic crisis. Although








President Echeverria had laid the foundation for the petroleum industry's
expansion by providing 17 percent of total investment to PEMEX (Levy and
Szekely, 1983:92), the new administration hastened the growth of this sector by
adopting "an ambitious $15.5 billion six-year program to accelerate petroleum
exploration, development, and production" (Mancke, 1979:61).
The Six-Year Plan (Plan sexenal) for the petroleum industry set a
production goal of 2.25 million barrels of crude oil per day to be reached by
1982 (Meyer, 1983:182). This lofty objective was reinforced by three principal
factors: rising international oil prices, ample foreign credit, and the unveiling of
a technical report by Director General Diaz Serrano which sharply upgraded
Mexico's proven reserves. The highly publicized deposits "attracted hundreds
of bankers, who literally elbowed each other out of the way to offer the federal
government and PEMEX loans on increasingly generous terms" (Grayson,
1983:415). The influx of petrodollars, combined with the rapid expansionist
program, augured well for L6pez Portillo's goal to restore public confidence in
the regime.
The dramatic increase in oil exports provided immediate success in
improving Mexico's trade balance and permitted the nation to settle in advance
its very unpopular 1976 International Monetary Fund (IMF) loan. Mexico
exported $800 m worth of oil in 1977, $1,800 m in 1978, $3,986 m in 1979, and
$10,402 m in 1980, while production exceeded the goal outlined in the Six-
Year Plan two years faster than planned (Philip, 1982:358). Emboldened by the
petrolization strategy, L6pez Portillo resorted to foreign loans to finance much-
needed United States' technology to drill new wells. PEMEX's share of the
public-sector foreign debt went from 11.3 percent in 1976 to 29.2 percent by
1981 (Teichman, 1988:66).








Although the oil strategy did result in higher growth rates at an average of
8.5 percent per year, as well as increasing the certification of reserves from 20
billion barrels to 50 billion barrels between 1978-1981 (Teichman, 1988:74),
the program's ultimate effects were disastrous for Mexico. As rapid expansion
became the keynote, Mexico resorted to borrowing heavily against oil still in the
ground. Moreover, technological requirements necessary for further exploration

dictated an increase in imports. The confluence of these factors contributed to a
larger amount of outlay than could be covered by export receipts. The massive
influx of petrodollars distorted other segments of the economy while debt grew
immeasurably. Manufactured goods and foodstuffs declined as exports in the
face of increased oil exploration. (See Table 3-1).
Beginning in 1980, a host of international factors accentuated the
Mexican economic crisis. The combination of a major economic down-turn in

the United States and the rise of international interest rates, severely hampered



Table 3 1 Petroleum and the Mexican Economy, 1976-1982

1976 1977 1978 1970 1980 1981 1982

Crude Production
average millions B/day .8 1.0 1.3 1.5 1.9 2.3 2.8

Crude Oil Exports
millions B/day .094 .202 .365 .533 .828 1.098 1.492

% Total Taxes
Paid by PEMEX 5.0 8.3 9.6 13.8 24.0 24.9 47.3

Oil as a %
of All Exports 35.9 34.0 42.0 32.3 19.3 14.4 15.9


Source: Teichman: 1988:152.








Mexico's ability to pay its scheduled debt obligations. Furthermore, with the
advent of the Iranian revolution, the Organization of Petroleum Exporting
Countries (OPEC) tripled the price of oil from $13 per barrel to $36. As a result,
Mexico succumbed to the lure of windfall revenues, resulting in more than
doubling public expenditures by 1981 (Kuczynski, 1988:79). When the world oil
frenzy peaked and an international surplus was created, Mexico was in no
economic position to follow suit. By this point, Mexico relied on petrodollars for
75 percent of its export earnings (Grayson, 1983:415). Combined with an
overvalued peso, and increasing internal inflation, Mexico could not remain
competitive in a buyer's market. In 1982, Mexico's financial woes were
exacerbated by the suspension of new commercial loans, subsequently
precipitating the debt crisis.


Political Implications of the Petroleum Expansionist Strategy
PEMEX, as a matter of basic policy since the expropriation, had generally
been defined as a vehicle for subsidizing domestic industrialization through the
provision of cheap energy. Consistent with this policy, only surplus oil was
permitted for export. In that vein, the industry did not occupy the leading role or
impetus for the nation's overall economic development. With the dramatic
change in oil resource exploitation in the 1970s, came the perception that the
industry's revenue potential would become the panacea for Mexico's economic
woes. In spite of the unfortunate economic effects of "petrolization," the
industry's unprecedented growth and potential for revenues as a state industry
gained it new importance as a prime mover in national economic planning. The
industry's prominence resulting from this new status as the "engine of growth"
for the economy, catalyzed a series of political changes within the organization
and at the national level.








One of the first examples of change emanating from PEMEX's ever-
increasing significance was in the area of the policy-making process. Prior to
the oil boom, the President of the Republic indirectly shaped oil policy by using
his appointment powers to select key individuals. These individuals included
the director general and six of the eleven members of PEMEX's board. The
President also maintained overall budgetary control over the firm.
Nevertheless, pre-boom administrations delegated authority to the Ministry of
Patrimony, established by L6pez Mateos, to govern PEMEX as a decentralized
industry. As a result of this arrangement, PEMEX enjoyed a large degree of
autonomy on such issues as gas versus oil exports and priorities given to
petrochemicals. Although the lines of communication between the President
and the director general were open at all times, the central government
generally respected the legal mandate outlining the Ministry of Patrimony's
governance.

The acquired importance of petroleum in the growth of Mexico's
economy as a result of the oil boom changed this scenario. Energy matters
became vital to economic growth, which in turn affected domestic and foreign
policy initiatives. This occurrence resulted in heightened presidential
involvement in oil policy and subsequently led to a more direct relationship

between the President and the director general. They became the key figures
in the formulation of petroleum policy at the expense of the Ministry of
Patrimony. Patrimony was effectively removed from the decisionmaking
process, despite remaining above PEMEX on the organizational flow charts.

The enhancement of PEMEX's status ironically led to the diminution of its
autonomy. Since PEMEX activities had become essential for the President in
national economic policymaking, close coordination and careful scrutiny of the
firm developed, essentially limiting the degree of autonomy once enjoyed by the








industry (Williams, 1979:114). More centralized control by the President was
required because PEMEX's transformation into a major earner of foreign
exchange "involved a balance of interests and not simply those within a single
agency" (Philip 1982:363). The development of tighter government monitoring
of the firm's operations reinforced the point made earlier concerning the more
direct relationship established between the President and the PEMEX director.
It would appear that this relationship, as well as the increased regulation, will
remain constant in light of the economic crisis of 1982. Indeed, as one analyst
of PEMEX's newly developed importance proposed "there would be less
reason for review and control of the oil industry if the rest of the economy
reached PEMEX's importance in providing exports" (Randall, 1989:194).

The increased presidential concern with PEMEX also demanded careful
scrutiny in the selection process of the director general. In addition to finding a
loyal ally to fill the office, technical requirements dictated a change from lawyer-
politicians to more technically specialized administrators. This trend of
"technical bureaucracies" and "tdcnicos" gained importance during Mexico's
import substitution model, but was accelerated by the effects of the oil boom
(Sanderson, 1983:328-29). For that reason, L6pez Portillo chose Diaz Serrano,
a close friend and political supporter, with significant administrative and
technical experience.

Diaz Serrano was a mechanical engineer trained at the National
Polytechnic Institute in Mexico City. He later studied at the University of
Maryland in a program sponsored by the United States Department of
Commerce's Inter-American Training Administration, where he gained expertise
in administration and in the technology of petroleum manufacture. He
accumulated a large fortune in the petroleum industry by putting his acquired








skills to work in building machinery for PEMEX. He later formed the Golden

Lane Drilling Company, which drilled offshore wells for Mexico's oil industry.
Through these ventures, Diaz Serrano developed many contacts within
PEMEX, but more importantly, he gained the necessary exposure which led to
his selection as technical advisor to L6pez Portillo on the assessment of the
nation's hydrocarbon wealth. Many argue that Diaz Serrano's report, which
maintained that it was feasible for Mexico to become a major exporter, earned
him the director-generalship (Teichman, 1988:60).

Once in office, Diaz Serrano surrounded himself with this new group of
technocrats, the so-called "tdcnicos," who advocated expansion and rapid
petroleum development. He placed loyal subscribers to this belief in positions
as subdirectors and technical advisors in the industry's major branches (see
Figure 3-1). The designation of these new positions prompted many of the old
guard "politicos" of the "Generation of '38" to retire or to accept other positions of
lesser importance within the firm. This leadership swing from "politico" to
"tecnico" contributed to the important shift in policy direction characteristic of
PEMEX in the wake of the oil boom.

The evolving trend of the technical bureaucracy also spilled over into the
realm of national politics. The new emphasis of oil-based development,
concomitant with the erosion of traditional populism in Mexico, has "technified"
the Mexican polity at the highest levels. In a sense, the need for specialization
at the presidential level has arisen as a result of the increasing interest in oil
policy. The ultimate irony of this "Dolitico" versus "tecnico" dichotomy is that the
attempted depoliticization of the system resulted in a return to equally adept
politicians. The new criteria of political recruitment based on technical and
administrative experience did not cause these new leaders to behave any
differently.





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Domestic Criticism of the Oil Boom Strategy
The decision to push petroleum development and export also triggered
substantial internal controversy in Mexico. The opposition reflected a
resurgence of old political issues which struck at the very core of Mexican
nationalistic thought. These disputes included the rejection of exploitation
policy, the rate and destination of exports, and the reliance on foreign
borrowing. The most revealing aspect of domestic criticism was its all-
encompassing nature. The wider array of opposition ranged from peasants to
state governors, thus posing real challenges to the Mexican political system.

The first significant case of domestic opposition concerned L6pez
Portillo's decision to construct a natural gas pipeline ("gasoducto") to the United
States. The rapid expansion of oil production created much more gas than
Mexico could consume. This left the administration with two options: either
continue to flare the surplus gas or reduce oil production. The practice of flaring
was considered a blatant waste of natural resources. The curtailment of
production was obviously an unacceptable alternative. With the absence of a
viable choice, the administration chose to export the gas to the United States
via an 800 mile pipeline. This decision was seen as a foolproof method of
obtaining foreign exchange, and the economic arguments in favor of the
pipeline were compelling. "In less than two years the pipeline would have more
than paid for itself, and the foreign exchange earned over its first six years
would top 10 billion dollars" (Fagen and Nau, 1979:396).
Nevertheless, the Mexican government misjudged the intensity of the
opposition. The critics of the "aasoducto" emerged in great numbers, led by
their most vocal opponent, Heberto Castillo, the leader of the Mexican Workers'
Party (PMT). The core objection to the pipeline owed its origins to the larger








issue of the rapidity with which petroleum was being exploited. Castillo's leftist
political opposition (including the academic community) held to the historical
conservationist argument. They argued against rapid exploitation of the

nation's non-renewable natural resources, particularly when exports were
destined to their northern neighbor. The pipeline connecting the two nations
suggested a quality of permanence which further exacerbated the nationalists'
anti-Yankee sentiments. The physical link to the United States conjured up old
anti-American charges, including "dependence, and capitulation to pressures
from the United States. Critics also feared that, in the event of a threat, a United
States' military occupation could result to protect its strategically critical source
of gas.
What followed these charges was a series of arguments and
counterarguments between the anti-Yankee left and the administration. The
government twisted the critics' charges by claiming that the pipeline signified
United States' dependence on Mexico. This obvious plea to Mexican
nationalism did not quell further attacks, so L6pez Portillo and Diaz Serrano
responded with other gestures to justify their position. Diaz Serrano went so far
as to appear on national television before the houses of the nation's legislature
to debate on the "gasoducto" issue. L6pez Portillo, during his annual State of
the Nation address in 1977, offered an apology for the gas pipeline.
Nevertheless, in an effort to put the issue to rest, the President made the bottom
line declaration: "If we are able to compensate our commerce with gas, we are
going to do it" (L6pez Portillo, cited in Williams,1982:43).
As previously described, the L6pez Portillo administration relied heavily
on foreign loans, especially American, to finance the oil expansionist policies.
In addition to the many who questioned the economic wisdom of such a policy,
others charged that the government and PEMEX were delivering the nation into








the hands of foreign lenders. In their nationalist bent, the left and dissident
"politicos" within PEMEX argued that oil policy was being dictated by the United

States and the IMF.
The government was explicit in its denunciation of this criticism, while
remaining staunch in defense of its policy. The administration claimed that the
decision to pursue the petroleum expansionist strategy was its own
responsibility. Moreover, governmental policymakers responded that the
financial problems were short term. However, the subsequent "overheated
economy" caused further reliance on foreign creditors to curb deficits, thus
making the short term promise a long term reality.
These cases of domestic controversy reflect the profound impact that the
change in petroleum policy had on the Mexican nation. When the nation's
leaders made the conscious decision to alter the industry's primary social
mission, significant debates ensued in the political arena. These debates
elicited strong objections to the increasing power of PEMEX, the financial
burden of expanding the industry, and the decisions to exploit and export
hydrocarbons. As we have seen, the concern over these changes in turn forced
policy makers to offer counter-arguments, and to some extent to extend national
apologies to justify their policies. Despite this degree of responsiveness, the
steadfast pursuit of the expansionist policy serves as a testimonial to the
importance placed on the new oil by the nation's leaders.


Summary
The year 1938 marked the end of a long struggle for Mexico in its efforts
to regain ownership rights over subsoil deposits. The expropriation
represented a victory with a very special connotation to a nation with strong
claims of nationalism. Since the expropriation of foreign enclaves, successive








presidential administrations have guarded the industry from foreign economic
penetration. The state's policy focus for PEMEX from 1938 through 1975
imposed the conservation of petroleum to fulfill an essential social mission. The
allegiance to the ideals of the revolution and the Constitution of 1917
determined the role of PEMEX by devoting production to serving the public
sector as opposed to a profit-seeking role.

Throughout this period, PEMEX was challenged by internal strife,
particularly from the oil workers' union, which sought greater control over
management of the industry. Foreign pressures also existed in the aftermath of
the expropriation in the form of boycotts and diplomatic exchanges over
indemnity of the nationalized oil companies. Mexico was able to overcome this
litany of problems during the firm's infancy, and the industry took a more normal
path until the mid-1970s. While remaining in the background of Mexico's
overall development strategy, PEMEX served as an adjunct to industrialization
by providing low cost fuel to Mexican industries.
Strict adherence to the "nationalist-conservationist" philosophy relegated
the industry to maintaining a moderate emphasis on exploration and drilling.
This policy coincided with a rise in domestic demand which left PEMEX unable
to keep pace with domestic consumption. The confluence of these factors led
Mexico to the onerous status of net importer of crude in 1968.

The large oil discoveries in the Tabasco-Campeche basin in 1972 put
Mexico on the threshold of a new era. These discoveries coincided with the
declining political legitimacy of the regime and serious economic problems
accentuated by the failure of President Echeverria's shared development
program. When L6pez Portillo assumed power in 1976, the newly found oil
wealth was envisioned as the springboard for overall economic growth and as a
possible solution to the existing social and political predicaments. L6pez








Portillo turned to a new strategy of rapid exploitation and export of petroleum,
marking the first important transformation in Mexican oil policy since the
expropriation. Initially, the new focus seemed to work, but with economic
growth, came the beginnings of "petrolization." This "neologism connoting an
overheated economy" (Grayson, 1983:415), was continued with reckless
abandon thus contributing to the debt crisis of 1982.

Despite the disastrous economic effects of this strategy, PEMEX gained
national prominence in the process of economic development planning. The
President and the director general forged a new relationship as the key figures
in oil policy as the importance of the new oil gave the state a more centralized
role in the planning process. As we turn to the post-boom era of the Mexican
petroleum industry, new challenges will be in evidence for the Mexican
leadership. Suffice it to say, with the advent of the debt crisis, which resulted
from policies of their own doing, difficult choices will have to be made as to the
role PEMEX will play in the national economy.












CHAPTER 4
THE CHANGING FACE OF PEMEX IN THE 1980s

Introduction
In the 1970s, the rapid increase in oil revenues followed by a chaotic
borrowing binge fueled an economic boom in Mexico. The petroleum industry
became a leading producer and exporter of oil and its derivatives. Due to the
significance of PEMEX's new role, it emerged as the dominant component in
Mexico's economic development planning. In fact, the industry had become so
important that other economic sectors were ignored. When oil prices fell in
1981, this over-reliance on oil turned the bonanza into the worst economic crisis
in recent Mexican history. Perhaps the most important lesson of the oil
strategy's failure was that policymakers could no longer pursue policies which
reflected mostly short-term economic and political considerations. Instead, a re-
evaluation was necessary that emphasized cross-sectoral planning to achieve
economic growth in the long term.
Consistent with this line of thinking, Mexico has learned that planning for
the future entails a decline in the importance of oil in the context of the total
economy. This is not to say that tax revenues and foreign exchange earnings
from exports would not continue to play an important role in the nation's
economy. However, previous emphasis on oil resource exploitation has made
leaders more conscious of the inherent distortions created by such a policy. To
avoid a similar situation, the administrations of Miguel de la Madrid Hurtado
(1982-1988) and Carlos Salinas de Gortari, Mexico's current president, have








exhibited restraint and more careful planning in the use of the nation's
petroleum resources. The more restricted role for PEMEX was also influenced
by the government's need to limit public expenditures. In a word, the nation's
ominous debt made economic retrenchment inevitable.

The preoccupation with meeting increased export levels in the shortest
possible time during the oil boom also contributed to the inefficient
management of the nation's oil industry. Domestic sales remained below cost,
fields were overworked, flaring increased, and expansion required
technological imports. The confluence of these factors meant that the energy
sector could not generate sufficient revenue to pay for its own expansion. This
predicament forced PEMEX further into debt as foreign loans were obtained to
finance operations. The combination of PEMEX's insolvency and the nation's
debt burden spawned considerable changes in Mexican oil policy of the 1980s.

As previously mentioned, the world oil glut and Mexico's subsequent
need for international assistance in tackling the debt crisis have injected a rare
element of pragmatism into Mexican energy policy. The decade of the 1980s
witnessed some new departures in Mexican energy policy which suggest that a
new transformation is occurring. Beginning under the de la Madrid
administration, efforts were undertaken to promote efficiency, to cooperate
closely with OPEC to support oil prices, and to add value domestically to
Mexico's energy resources. Subsequently, under the current Salinas
sexenium, continuing advances have been made to open the industry to both
domestic and foreign investment, to privatize certain segments of PEMEX, and
to liberalize the practice of contractual agreements with private firms. These
changes have coincided with the government's recent tendency towards more
privatization of the economy. This chapter describes the ongoing








metamorphosis of the petroleum industry, focusing on the new direction which
oil policy is taking.


The de la Madrid Administration and the "New PEMEX"
On December 1, 1982, Miguel de la Madrid Hurtado took the presidential
sash from L6pez Portillo. His assumption to office marked the continuation of a
recent trend in Mexican politics: that of selecting a "tdcnico." This move
substantiates the argument that "for the new president to be successful as a
manager of the complex economic issues facing the state, he has to offer
substantial technical expertise, in contrast to previous presidents whose
legitimation functions--and recruitment--were more expressly linked to party
criteria" (Sanderson, 1983:331-32). Miguel de la Madrid had vast
administrative experience and therefore met this criteria. After earning a
master's degree in public administration at Harvard University, he served as the
advisor to the administrator of the Central Bank of Mexico, in various positions,
including director general of credit in the Finance Ministry, and subdirector of
finances for PEMEX.

Miguel de la Madrid replaced most nationalist populists with "t6cnicos" in
all of the important policymaking posts in the government to include his new
director general of PEMEX, Mario Ram6n Beteta. Beteta was a quintessential
technocrat who obtained a master's degree in economics at the University of
Wisconsin. He later spent more than twenty-five years in the financial
bureaucracy occupying key posts in the Bank of Mexico and the Finance
Ministry. His uncle had been a finance secretary and professor who strongly
influenced the new generation of technocrats that gained prominence in the PRI
in the early 1980s. His managerial skills, proclaimed honesty, and conservative








economic philosophy were well-suited for the task at hand, directing PEMEX
into a more efficient enterprise.
Having established a team dominated by technocrats, de la Madrid set
forth an "economic reorganization program" which emphasized, not
surprisingly, the need for austerity and structural changes in the Mexican
economy. The aim of developing a "mixed economy" stemmed from his
rejection of his predecessor's oil-led development strategy. De la Madrid
sought to trim public subsidies, eliminate inefficient government-owned firms,
pursue realistic prices, and decrease the state's role in the economy (Grayson,
1988:47). These commitments were in keeping with the prescriptions outlined
in the November 1982 accord between Mexico and the IMF.

Parallel to the president's stated economic objectives, the focus for the oil
industry took on new directions. Miguel de la Madrid's statement in the 1984-
1988 National Energy Program (Programa Nacional de Energ6ticos) conveyed
his general policy guidelines with respect to his vision of a "new PEMEX:"

The development policy adopted by our country reaffirms that we
must avoid the petrolization of the economy and this signifies that
structural change in energy must march to the rhythm of the
structural change of the entire society and that, in the long term, the
sector should lose weight in an economy that is more diversified,
more modern, and more efficiently linked to the exterior. (Miguel
de la Madrid Hurtado, cited in Weintraub, 1990:114)

The president's objectives for the role of the petroleum industry are aptly
summarized by Sidney Weintraub in his work, A Marriage of Convenience:
Relations Between Mexico and the United States as follows:

1. Limiting production of crude oil to conserve this resource as long as
possible;
2. Restricting exports for the same reason;








3. Cooperating with OPEC to support crude prices;
4. Diversifying markets for crude oil, even if this involves some price
sacrifice because of higher transportation costs to destinations other
than the United States;
5. Recognizing the need for crude-oil export revenue to meet Mexico's

external debt burden and to carry out its development program;
6. Using natural gas produced in associated wells efficiently at home;
7. Facilitating conservation of these depletable natural resources by
encouraging development of other energy resources, such as
nuclear, and by pricing and other policies that discourage profligate
use of energy resources;
8. To the extent possible, adding value domestically to Mexico's

petroleum and gas resources, such as through further development
of the petrochemical industry, and;
9. Above all, not repeating the previous experience of petrolizing the
Mexican economy, both directly by exploiting oil reserves and
indirectly by mortgaging Mexico's future development to borrowings
predicated on the existence of oil in the ground (Weintraub,
1990:127).
Several of the outlined objectives reflect the new administration's
adherence to previous nationalistic policies, particularly the taboo of selling oil
abroad to facilitate conservation of the national patrimony for future generations.
However, certain elements of the policy guidelines detract from earlier policy.
The emphasis on pricing energy resources to encourage conservation is one
example of a deviation from traditional Mexican oil policy. As far back as the
nationalization of the industry, domestic oil prices were kept low as a politically








necessary doctrine. In spite of some attempts by previous administrations to
increase prices, "no government in power could bring on itself the political

suffering that domestic price increases would inevitably cause" (Baker,
1984:153). Domestic energy price subsidies had simply been too deeply
entrenched an element of nationalistic thought.

The political basis of the oil price decisions seems to have been
overshadowed by the realities of economic necessity and the need for
efficiency. The implementation of this new pricing policy was aimed at
promoting the conservation of energy so that "the waste of a nonrenewable
resource is avoided and the rationalization of consumption is achieved" (Perez-
Gazga, 1983:27). Prior to 1983, the domestic prices of oil products remained
well below those on the world market. The price of the most widely used
gasoline in Mexico was equivalent to 16 cents a liter compared to 32 cents in
the United States and 58 cents in the United Kingdom. Liquid gas sold for 6
cents a kilogram in Mexico while the cost in the United States was 32 cents.
The comparison for diesel was 9 cents a liter in Mexico and 32 cents in the
United States (Weintraub, 1990:122). However, by year's end, prices had
increased at 2.5 percent each month (Randall, 1989:49).

Laura Randall, in The Political Economy of Mexican Oil, likens previous
administrations' attempts to raise prices to a predictable occurrence in the latter
years of the presidential term. The cyclical modifications would take place in
the last two years of the sexenium in response to lobbying by PEMEX.
Nevertheless, the various interest groups prior to the de la Madrid
administration had mustered sufficient political influence to mitigate against
price increases. The concept had been discussed for years and very modest
increases had occurred, but the practice had generally been muted to prevent








rising prices from becoming a major political issue. This change in oil policy
resulting from the government's inability to support the subsidies, coupled with
other austere measures adopted in 1982, unfortunately "turned out to be an
issue delayed until the worst possible time" (Weintraub, 1990:122). De la
Madrid's attempted justification for the change in pricing policy was geared to
prevent a conflict with the nationalistic and egalitarian principles that had
previously guided Mexican energy policy. However, his concept that the
Mexican people "have an obligation to nurture the financial health of their
nationalized industries" (Miguel de la Madrid, cited in Baker, 1984:76), is
evidence of the shift in emphasis from support of the individual consumer to
support of the nation's financial exigency.
A second change of direction in Mexican oil policy, initiated by President
de la Madrid, was his emphasis on seeking cooperation with OPEC to stabilize
the world petroleum market. Previously, Mexico had remained aloof from OPEC
as "Mexicans in general, and PEMEX officials in particular, have not desired to
sacrifice the autonomy that has earmarked their petroleum operations and
transnational commerce" (Joyner, 1982:96). PEMEX has been traditionally
hesitant to associate itself with any organization that would restrict its ability to
set petroleum prices, production and export limits, and independence in
international relations. PEMEX has resisted joining OPEC and has enjoyed

virtual freedom in setting petroleum prices at a higher level than those of OPEC.
Following OPEC price hikes, Mexico's prices have ranged from $1.00 to $2.00
per barrel more than OPEC (Joyner, 1982:97). Non-membership was also
motivated by Mexico's fear of losing "the tariff benefits under the United States
generalized system of preferences" (Weintraub, 1990:122).








In spite of the Mexican government's continued policy of
nonmembership, the de la Madrid administration replaced competition with
cooperation. This new focus, intended to avoid conflicts with other oil producing
countries, is evidence of Mexico's desire to fashion an "international energy
policy" that would "maintain stability in the petroleum market and contribute to
avoiding sudden changes in prices that would damage the international
economy"(Baker, 1984:187). The director general proclaimed that Mexico
would abstain from the irregular commercial practices of discounts and
involvement in speculative maneuvers (Beteta, 1987:78), that had characterized
the latter years of the L6pez Portillo administration upon the collapse of world
oil prices.
In 1983, PEMEX embarked upon a new era by forging closer ties with
OPEC. Mexico agreed to hold off quoting prices to buyers until OPEC fixed its
price. When OPEC announced that the cartel had set lower limits on prices and
export quotas, Mexico followed suit by bringing its price in line and placing an
export ceiling consistent with the cartel's guidelines. In 1986, as a response to
the "third oil shock," Mexico agreed to reduce its crude-oil export ceiling from
1.5 to 1.35 million barrels a day and then again in 1987 to 1.32 million barrels
(Weintraub, 1990:122). An example of further cooperation is the action taken by
Mexico in 1988, along with five other non-OPEC nations (Egypt, China,
Colombia, Malaysia, and Oman), to cut oil production by 5 percent if matched by
OPEC nations. Although this OPEC initiative never materialized, Mexico's
participation reflected a dramatic change in the direction of PEMEX policies.
For a nation which had for so long considered the relegation of pricing matters
to foreign refiners to be anathema to its revolutionary tradition, these new
priorities signalled a new wave of change in Mexican oil policy.








Pursuant to the new drive towards better efficiency, de la Madrid
attempted to challenge corruption in the oil union. His strategy for the creation
of a "new PEMEX" entailed the elimination of waste and fraudulent activities
which infested the STPRM. The so-called anticorruption theme, "moral
renovation," was regarded as the first real challenge to the historically corrupt
union. Previous Mexican presidents had regularly vowed to curb corruption in
the union ranks, but each had fallen short on their promises.
Perhaps the most dramatic accomplishment of this program was the
imprisonment of former director general Diaz Serrano for the embezzlement of
U. S. $34 million in connection with the purchase of two foreign-built natural gas
tankers. Several other union officials were removed for corrupt practices. In
1984, the government terminated the concession which awarded the STPRM
40 percent control over the subcontracting or selling of public contracts to third
parties for onshore drilling (Grayson, 1988:64). The drilling contracts were
centralized in the union-dominated National Commission of Contracts with
Joaqufn Hernandez Galicia (La Quina) at the helm. Hernandez Galicia
subcontracted the projects to companies owned by loyal union officials, thus
feeding the system of racketeering and featherbedding that had become such a
common occurrence in trade union practices. One of the most flagrant abuses
was the drilling of needless wells in which there was no evidence of petroleum
presence. Nevertheless, HernAndez Galicia's confidants could enrich
themselves through these unjust ventures.
President de la Madrid and his director general deemed it necessary to
combat the inefficient and corrupt system that diverted resources from a
government strapped for funds. Although their efforts led to some small
victories against the self-serving union leadership, the administration could not








overcome the extensive influence of union groups who "were determined to
hinder or even sabotage those measures that threatened to undermine their
power or interfere with their interests" (Boltvinik, 1988:549). Nevertheless, the
de la Madrid administration marked a distinct change from previous executives
who were known to adopt anticorruption crusades, but failed to execute a
program of any substance. De la Madrid's "moral renovation" program was
more than a political sideshow. His anticorruption initiatives were legitimate,
no-nonsense attempts to use resources prudently in a sector of the economy
whose own practices undermined the stated objective of efficiency.
As previously discussed, foreign participation in the oil sector has been
inherently unpopular in Mexico. Throughout the history of the industry since the
expropriation, all efforts to allow foreign interests back into the sector have
catalyzed domestic political opposition cloaked in such terms as dependency,
nationalism, and sovereignty. Beginning with de la Madrid, however, a change
seems to have taken place, as evidenced by his initiatives in petrochemicals.

Basic petrochemicals had been reserved solely for PEMEX by legal
mandate, while private interests, both foreign and domestic, were permitted to
manufacture secondary petrochemicals as long as Mexican companies
maintained majority ownership. By using an expansive definition of basic
petrochemicals, Mexican presidents to this point imposed state control over the
majority of the sector. De la Madrid significantly altered the sector by
reclassifying thirty-six basic products as secondary, thus permitting private
production. With this action, de la Madrid set the stage for additional
reclassifications under his successor, Carlos Salinas de Gortari.








PEMEX Restructuring Under Salinas
President de la Madrid faced the herculean task of confronting the debt
crisis when he took office in 1982. His two-fold strategy of reducing the
economic role of the state through privatization ("desincorporaci6n") and
commercial liberalization demonstrated by Mexico's accession to the General
Agreement on Tariffs and Trade (GATT) in 1986, resulted in virtually no growth
during his term in office. The debt had grown to over $100 billion, real wages
had declined by at least 40 percent between 1982 and 1988, and the nation
was exporting 5 percent of its GDP for debt service (Smith, 1989:397).
Certainly, the economic prospects were not encouraging when Carlos Salinas
de Gortari assumed the presidency on December 1, 1988.
President Salinas, a Harvard-educated economist, wasted little time
implementing dramatic steps to open and modernize the Mexican economy. In
keeping with his predecessor's policy of reducing the economic role of the state,
Salinas has privatized key state enterprises including both national airlines, the
telephone company, mines, steel mills, and the national insurance company.
Additionally, he obtained congressional approval to return the previously
nationalized banks back into private hands in an effort to repatriate flight capital.
In order to pressure Mexican producers to become more efficient, President
Salinas has relaxed import restrictions. In May of 1989, a new code was

adopted which liberalized foreign investment regulations. These revolutionary
achievements in a nation known for advocating a highly protectionist
philosophy, made clear President Salinas' intentions to fashion an efficient and
competitive system.

In keeping with Mexico's acceleration into the world economy under
President Salinas, the oil industry is undergoing changes which differ








significantly from its traditional nationalistic policies. Devastated by the 1986 oil
shock, the industry experienced a 60% reduction in net oil export revenues
which in turn aggravated PEMEX's mounting debt burden (Niering, 1988:328).
The oil-price collapse also forced PEMEX to cut spending in such key areas as
exploration. Concomitant with a lack of diversification, an overstaffed and
corrupt bureaucracy, and continued low international oil prices, the industry
faced a severe financial crisis in 1988.
President Salinas has pledged to restructure the financial base of the
state oil company to correct these financial exigencies. Consistent with the
overall economic reform program, he has instituted new policy alternatives that
have opened the industry to private participation. There are indications that
PEMEX is developing a more international focus as evidenced by the rise of
joint venture agreements, and the formation of Petr6leos Mexicanos
International (PMI), the international marketing arm of PEMEX. This
organization is charged with buying, selling, and taking advantage of trade
opportunities to obtain new technology for the diversification of the industry. In
light of these efforts, PEMEX's role appears to be changing to one resembling
that of an international oil firm. Perhaps the most revealing indicator of Salinas'
resolve to restructure the oil industry, was his use of military force to arrest the
union's strongman and known Salinas opponent, La Quina.


The Petrochemical Sector
The liberalization measures espoused by President Salinas crystallized
much debate and speculation concerning the role of the private sector in
Mexico's oil industry. Many analysts have conjectured, in light of PEMEX's
staggering debt, limited capital for exploration and development, and inherent








inefficiencies, that the oil industry would soon become a prime candidate for
private (including foreign) competition. To quell this speculation, the President
and Francisco Rojas, director general of PEMEX, vehemently denied that the oil
industry would take the path of privatization. They countered that "ownership
and control of PEMEX is irreversible" (Jacob, 1990:76).
Nevertheless, these official denials have been followed by new openings
to private capital, causing the director general to proclaim, "the company is
interested in uniting the forces of PEMEX with those of innovative initiative in the
private sector" (Rojas, cited in Oil Daily, June 1, 1990:4). Evidence of this
change of direction in oil policy was the Salinas administration's reclassification
of another 14 "basic" or "primary" petrochemicals as "secondary." Combined
with de la Madrid's previous reclassification of 36, the total number on the
"secondary" list increased to 66 while the "basic" list (reserved exclusively for
PEMEX) decreased to 20 (Turner and Layton, 1989:25).
The reduction of state activities in the petrochemical sector signifies a
deepening of the pragmatic nature of oil policy that began to emerge under
Miguel de la Madrid. The liberalizing of this sector through the redefinition of
these products had allowed PEMEX to redirect investments to other key areas
of the industry. Moreover, the fact that the law governing petrochemicals was
modified to allow private investment reflects a significant change in the
nationalistic tendencies which previously guided policies.

In addition to the major reduction in the number of petrochemical
products that can be manufactured by the state oil monopoly, the Mexican
government has stepped up efforts to allow private investors to enter the "basic"
sector. To obtain the needed finance and technology for expansion of the
primary sector, Mexican law has been revised to enable investors to own 100%









of a venture for a 10-20 year period, 40% through direct investment and 60%
through special trust funds. Investors are offered the option to either enter into a
build-lease agreement with ultimate ownership or purchase futures in
petrochemical products (Petroleum Intelligence Weekly, October 30, 1989:3).
Since the implementation of the new policy, two private Mexican chemical
companies concluded an agreement with PEMEX to build basic feedstock
plants in exchange for the financing of the project (World Oil, April 1990:13).
These "joint ventures" demonstrate the potential avenues available for PEMEX
and the Mexican government to obtain much needed capital investment in other
sectors while operating within the framework of the constitution.

OPEC Solidarity
The Salinas administration has also maintained the policy of setting
official export prices in solidarity with OPEC. Beginning under de la Madrid, the
oil industry sought a new relationship, based on dialogue, to restore stability in
the highly volatile oil market. In 1989, PEMEX announced that its export quota
would be reduced by 68,000 barrels per day (5% of the nation's export goal) to
support the world oil stabilization efforts between OPEC and the independent
oil producing nations (Platt's Oilgram News, March 6, 1989:1). The continuation
of this policy reflects Mexico's new political desire to participate actively and
responsibly in the world oil market. Beyond the symbolic gesture of global
cooperation, these decisions stem directly from lessons learned about the
debilitating effects of the industry's inconsistency in its oil export pricing policy of
1981.








International Outlook
In keeping with the recent trend for an outward oriented petrochemical
industry, and continued cooperation with OPEC, PEMEX has made further
strides towards a more international outlook. Many scholars have criticized
PEMEX in the past for its lack of diversification and integration into the
international market. This criticism is best captured in the words of Gabriel
Szekely:

The Mexican government's reluctance to diversify the
international operations of the oil industry is regrettable. PEMEX
has failed to become a modern and aggressive trading agent in
world markets commensurate with the size of its oil reserves, its
assets, and its relative weight both in terms of production and
exports. (Sz6kely, 1989:1783)

Critics have found fault with Mexico's adherence to oil policies which
emphasize the export of crude oil while hesitating to venture seriously into
downstream operations such as refining and petrochemicals. Several reasons
for Mexico's hesitancy to deal with foreign companies have been presented.
The unsatisfactory origin of the industry under foreign control has consistently
discouraged executives from pursuing international agreements, particularly
with the United States. Mexico has also coped with a rapacious oil union
whose indomitable power and corrupt practices have withstood any attacks
generated by past administrations. In a word, "the highly restrictive domestic
political environment has obstructed efforts at diversification" (Sz6kely,
1989:1783).

As noted, the oil industry has made significant inroads into the chemical
sector by cleverly redefining products to foster partial privatizations and
expansion of the industry. PEMEX has also established strong international








links in Europe and the Far East. The Salinas administration has recently
decided to forge "strategic alliances" with Japan and Spain to gain better
access to the world oil market and to seek foreign capital for downstream
operations. PEMEX decided to purchase 10% of Spain's state controlled oil
company Repsol (Oil and Gas Journal, January 8, 1990:11). The partial
acquisition of this Spanish refinery bodes well for PEMEX's new international
ventures, particularly since Spain joined the European Economic Community in
1986. Furthermore, Repsol has indicated a desire to participate in PEMEX's
downstream projects as part of its overseas expansion.

In early 1990, Japan invested U. S. $15 million in the "Pacific Petroleum
Project," a pipeline, storage, and refining system connecting Mexico's Gulf
facilities with the Pacific Coast (Oil Daily, June 1990:B-5). This joint venture will
provide Mexico with greater capacity to transport oil along the trans-Mexican
Pipeline, increase crude storage capacity, expand refinery capacity, and
provide a plant to export liquified gas. Japan will benefit from a long-term
supply of oil through 1995, and Japanese importers will be able to bypass the
Panama Canal. These examples of "joint ventures" represent significant
achievements in Mexico's recent efforts to diversify its international operations.

In addition to the expansion of crude export clients, the new alliances
hold particularly bright prospects for foreign investment ventures in the Mexican
petroleum industry. More importantly, PEMEX's investment in Repsol, if
successful, could convince the Mexican government of the value of using
company revenues to fund the industry's expansion. These investments also
enhance the industry's efficiency by "isolating PEMEX managers from such
quagmires as government controls and union corruption" (Szekely, 1990:1784).