The Aunt in the Attic

"By the time the price slump hit exports Caracas was already into grades of Orinoco Heavy that resembled tarry pipe opium."

Many eyes are now on Venezuela, which the Organization of American States is trying desperately to keep from becoming a failed state, but just up the coast lies another Bolivarian Republic leaning like a domino.

Mexico’s wells are running dry.

You would almost not know if you took your news from television or the mainstream media. It is like a closely guarded secret — the aunt in the attic.

While international prices Mexico gets for its crude fell 18% in 2015 and another 10% this year, the average VW bug owner in Morales is paying 11% more (vs. 17% in the US) every time they pump a liter. The government is slowly releasing price controls at its retail PEMEX stations, trying to hold fluctuations at +/- 3%, but warning of completely unregulated prices coming in 2018. It hopes to sell off its retail chain by then.
 
This is not neoliberalism driving that kind of change, although Mexico has more than its share. It is a desperation to stem its own domestic appetite for oil. Mexico is becoming an oil importer.

Not long ago Mexico was the US’s single largest supplier of crude. The giant field at Cantarell was second only to Ghawar in Saudi Arabia. Today Ghawer still produces 4.5 million barrels per day (mmbd) of 350-million-year-old sunlight — down from 5 million mmbd a few years ago — while the giant Cantarell, which once produced 2.1 mmbd, has been on nitrogen drip since 2000 and is approaching closure. PEMEX, Mexico’s recently-privatized national oil company, will spend $US 6 billion this year in a Quixotic attempt to maintain production levels at around 325,000 bpd.

In April Mexico’s oil export revenues fell 30.8%.  That month the national trade balance showed a deficit of $6.65 billion dollars. Mexico’s trade exchange with the US is roughly neutral in non-oil areas — $30.4 billion exported against $32.5 imported in April, for instance. What allowed the Mexican economy to grow was the extra $300 billion per year coming in from oil sales, creating a 2:1 favorable balance of trade.

In 2015 Mexico’s oil export revenues fell 45 percent. Petroleum now makes up about 5% of total exports, compared with about one-third in 1990. It was not just the decline of the world price, although that certainly hurt. 

Mexico is running dry.

One need only gaze a little farther south to see how that progression will play out.  Venezuela’s problems are often blamed on politics, Hugo Chavez’s populist redistributions,  generous foreign aid, CIA covert efforts to destabilize, and class warfare, but truth be told, Venezuela was an oil addict and its habit outgrew its abilities to find the next fix. By the time the price slump hit, Caracas was already into grades of Orinoco Heavy that resembled tarry pipe opium.

Last year Venezuela’s oil revenues, really its only source of trade, fell 40%. At the same time, climate change struck its agriculture and hydroelectric sectors with a megadrought. Nonetheless, its creditors demanded timely payment on loans — $7 billion per year — or risk default and IMF sanctions a la Argentina or Greece. Much of that debt was racked up by the state-owned oil company, PDVSA (aka Citgo), which had a drill-baby-drill philosophy through the Chavez years. 

On April 22, Venezuela’s leaders announced mandatory electric fasting — 4 hours per day — formalizing the blackouts that people had already been experiencing. Electricity Minister Luis Motta said the rolling blackouts would last for 40 days or until water levels stabilize at the Guri Dam. 

In April, federal employees were reduced to a 4-day work week. In May, it was cut to two. The health care system has collapsed, the crime rate is one of the world’s worst and the slide of the Bolivar is uncontrolled. By some estimates, inflation could reach nearly 500 percent this year and 1,600 percent in 2017.

The amount of time ordinary Venezuelans spend to purchase life’s daily necessities has frustrated and angered them, and this builds a slow burn of civil unrest with calls for impeachment or revolution. Looking for popular support, President Maduro has gone after business leaders, arresting the managers of a pharmaceutical and other companies on charges of artificially creating shortages.

On May 15 The New York Times’ Nicholas Casey reported:

The day had begun with the usual hazards: chronic shortages of antibiotics, intravenous solutions, even food. Then a blackout swept over the city, shutting down the respirators in the maternity ward.

Doctors kept ailing infants alive by pumping air into their lungs by hand for hours. By nightfall, four more newborns had died.

***

The figures are devastating. The rate of death among babies under a month old increased more than a hundredfold in public hospitals.

***

Here in the Caribbean port town of Barcelona, two premature infants died recently on the way to the main public clinic because the ambulance had no oxygen tanks. The hospital has no fully functioning X-ray or kidney dialysis machines because they broke long ago. And because there are no open beds, some patients lie on the floor in pools of their blood.

***

“I doubt that anywhere in the world, except in Cuba, there exists a better health system than this one,” Mr. Maduro said.

Late last fall, the aging pumps that supplied water to the University of the Andes Hospital exploded. They were not repaired for months.

So without water, gloves, soap or antibiotics, a group of surgeons prepared to remove an appendix that was about to burst, even though the operating room was still covered in another patient’s blood.

***

In a supply room, cockroaches fled as the door swung open.

Dr. Diaz logged a patient’s medical data on the back of a bank statement someone had thrown in the trash.

***

Doctors tried everything they could to keep the babies breathing, pumping air by hand until the employees were so exhausted they could barely see straight, she said. How many babies died because of the blackout was impossible to say, given all of the other deficiencies at the hospital.

In January Mexican President Enrique Peña Nieto began to dance with the shadows his future throws. The government announced $8.3 billion in budget cuts, much of it falling most heavily on PEMEX, now generally regarded as a wasted investment of the past decade. He also  canceled the Chinese bullet train project that threatened to expose corruption tied to his family’s personal wealth.

As its oil company struggles, Mexico has made commitments to tackle climate change. In 2012, the Mexican Congress unanimously voted for a General Law on Climate Change, which went into effect later that year — making Mexico the first developing country to pass a comprehensive climate change law. Some of the aims of the law are to set mandatory greenhouse gas emissions requirements, reduce fossil fuel subsidies and increase renewable electricity generation to 35 percent by 2024. Owning a national oil company does not seem to square with that law.

— Gina-Marie Cheeseman, Mashable

PEMEX had been Mexico’s cash cow for half a century, financing a meteoric rise in standards of living. This miracle came thanks to the heroic stand of Lázaro Cárdenas Del Rio against Franklin Del Roosevelt in the 1930s, defying the effort of the Seven Sisters  to glom Mexico’s oil by blocking the transfer of refinery technology. After Mexican scientists successfully developed their own process, Cárdenas sent FDR a vial of clear, home-brewed gasoline. Goaded by Winston Churchill, Walter Teague and other oil obsessives almost to the point of invasion, FDR was dissuaded by his Joint Chiefs, who were riveted by Germany’s remilitarization and what it foretold. He turned his gaze away and left Cárdenas alone.

In December of 1941, when Pearl Harbor was attacked, Mexico was one of the first countries to pledge support and aid, and severed all diplomatic ties with the Axis powers. Grateful, FDR placed large contracts for Mexican oil and sent technicians to quickly build up Mexican mining operations for much-needed metals like mercury, zinc, copper and more. After FDR visited the Mexican President in Monterrey, transfers of US weapons and training began and the Mexican Air Force, Fuerza Aerea Mexicana (FAM), fledged the Aztec Eagles, who aided in the conquest of the Philippines, Formosa, Okinawa and Kyushu, flying P-47s (‘Peh-Cuas’) with bright Mexican tricolor markings on the tail and U.S. star-and-bar insignia on the fuselage and wings.

Mexico was warned of impending petrocollapse more than 10 years ago by the top brass at PEMEX. It might have made efforts to dampen Catholic fecundity and curb consumer growth, ration fossil reserves and build out its renewable portfolio. Instead, a succession of administrations — Salinas, Fox, Calderon, Peña-Nieto — poured billions into new drilling technology and offshore exploration. What came out of the ground was too little, too late, but until 2014, when it finally began liquidating PEMEX and cutting its losses, Mexico never stopped hoping to hit another jackpot. 

As a hedge, Mexico poured its final decade of oil profits into boosting tourism — one only need look at Cancún, Puerto Vallerta or Cabo San Lucas — and until now that seemed to work. The country’s azure seas and sandy beaches realigned international air routes. Hotels, restaurants and adventure tours boomed.

A trifle short-sighted, we would say.

Cancún was devastated by Hurricane Wilma but rebounded on the strength of tourism. Can it do that again? And again?

Tourism, even ecotourism, can boost the economy of a remote region, but only as long as jet travel is cheap and flights are available. Tourism is profoundly fragile, compared to say, agriculture. Mexico’s tourism was hampered by air travel security measures put in place after 911, a drumbeat of largely-unsubstantiated scares about endemic bird flus, Zika, Dengue and West Nile, uncontrolled kidnappings and random street violence, often at the hands of police and federal army, and other threats to unwary teens on Spring Break. 

All of these pale in comparison to peak oil or financial crash. Global tourism’s circulatory system is on an IV drip that requires regular infusions of First World discretionary spending power and discount airfares. Right now, airlines are basking in the glow of low petroleum prices. It can’t last, and neither can the happy-go-lucky Mexican tourist economy. Mexico doesn’t just import petroleum and vacationers now. It imports rice, beans, corn and tomatoes.

Venezuela’s failed state is instructive. What will a Mexican failed state with a long border and deep cultural ties mean for the United States? President Trump may not have to wait long to find out.

One hopeful note is a new initiative Mr. Peña Nieto is taking to ramp up a small but pricey agricultural sector that could keep the Mexican economy afloat, even in hard times.

The United Nations special session on drugs was heavy on empty talk, but several positive things came out of it. One was that there is no appetite to make countries abide by the United Nations treaties that prohibit the legalization of marijuana. Another is that a range of voices across the world are calling for a new approach to drug policy. The growth of a legalized, binational marijuana market would be a step toward turning those calls into reality.

— Ioan Grillo, "Legalized Pot, Free Trade," NY Times Opinion Page

What Peña Nieto has proposed for Mexico for now is to allow cannabis consumption but leave growing and selling of it to the illegal market, effectively continuing the profitable  Drug Wars, criminal syndicate finance of local politics, and police-gadget pork supplied by the DEA and Pentagon. If Mexico were to take the next step up the attic stair and legalize production and sale, its world-famous strains could rival anything being grown in Colorado and Oregon. It could have a trade balance to rely on.