Nationalization of Mexico’s Oil and Gas Industry

Introduction

The Mexican revolution that began in 1910 and continued for ten more years had far reaching impacts on all aspects of life of the Mexicans. Several bloody revolutions took place between 1910 and 1920. The peak of these revolutions was in 1917 when Mexican constitution was drafted. Several sections of this constitution shaped a variety of events that took place in post-revolutionary Mexican politics. Article 27 of this constitution was important as it restricted subsoil ownership to the state.

In this paper, I will focus on the Mexican revolution and especially on the events leading to the creation of constitution of 1917. The paper will also look at nationalization of the Mexican oil industry and the events that preceded the expropriation foreign oil company property in Mexico.

The Mexican revolution of 1910-1920

The Mexican revolution of 1910-1920 rose following mounting discontent of President Porfilio Diaz’s government. Diaz rose into power through what he claimed as liberalizing movement whose motto was “effective suffrage, no reelection”. However, he remained in power for thirty four more years disregarding the no-reelection pledge (Joel 2001, 541).

This revolution that began in 1910 was a bitter and a bloody war that involved a variety of armies seeking the control of Mexico in a period of ten years. By this year, Mexico had been under the rule of Porfirio Diaz who had overthrown French installed emperor Maximillan. Diaz ruled Mexico in a dictatorial fashion from 1876 up to 1911 when he was overthrown by Madero. During his rule, the economy of Mexico prospered at the expense of the peasants and the working class whose living conditions continued to worsen significantly.

Workers were paid lowly while majority of Mexican wealth was in the hands of ruling families; an insignificant proportion of the population. As a result of these injustices, liberal opposition began to take root to challenge the dictatorial rule of Diaz. This opposition was led by Madero who challenged Diaz while still in prison under the support of anti-Diaz rebel.

When he was released from behind the bars, Madero fled to USA from where he emerged in 1910 to start a rebellion. The result was a long protracted struggle that tore Mexico apart and untold suffering to the ordinary Mexican citizens (Walsh & Quesada 2006, 5).

Madero, together with Pancho villa and Pascual Oroczo forced Diaz and his deputy to resign in mid-1911. Rather than take the presidency, Madero allowed for an interim president while he run for election in late 1911. When Madero ascended to power, he continuously faced opposition from former friends of Diaz and radical revolutionists led by Zapata whose interests were in land reforms and other policies. On February 18, 1913, Madero was overthrown and murdered by Victoriano Huerta (Camp 2011, 84).[1]

The constitution of 1917

The death of Madero set in place a radical phase of Mexican revolution that occurred between 1913 and 1916. The revolutionary principles of this period became incorporated into the constitution of 1917. Article 27 of the constitution has remained the most crucial aspect to dat.

The first paragraph of this article granted the nation the power to expropriate property for the sake of public rights and equitable distribution of resources. Paragraphs four and five also grant the nation full ownership of all resources in the subsoil. The distrust shown towards the US by Mexican nationalistic emerged from the US ambassador allowing Madero to be overthrown and killed. Venustiano Carranza ascended to the throne in 1916 and was himself succeeded by General Alvaro Obregon in 1924 (Gordon 1 1965, 34).

Constitutional amendment of 1928

Political ambitions and the desire to run for a second term in office made Obregon to amend the constitution in order to allow nonconsecutive reelection. Although Obregon went ahead to win the reelection, he was assassinated before being sworn in. what followed was a series of important political changes that have lasted to date.

Lazaro Cardenas

Lazaro Cardenas was born in Michoacan in 1895. With the support of the constitutionalists, Cardenas joined the Mexican revolution as a captain in 1913 at the age of 18. He participated in numerous other battles such as those fought against Zapata and Villa. Cardenas served under General Plutarco Elias Calles.

Cardenas went ahead to support the government against the army rebellion of 1923 and 1929. He was also engaged on the government’s side against Cristello rebellion of 1928. By 1928, Cardenas had reached the rank of divisional general. Cardenas went ahead to serve as a governor, president of the National Revolutionary Party (PNR), and secretary of national defense. He resigned as the secretary of the National defense in 1934 to serve as NPR’s flag bearer for presidency (Camp 2011, 100).

When Calles influenced the decision to choose Cardenas as the party’s flag bearer, he believed that he would be the power behind the throne. However, Cardenas applied his political skills to outmaneuver the ex-president and forcefully exiled him to the US in 1935. He believed that president could only have control over the political system only when they were in power but not afterwards.

This was the first major political principle introduced by Cardenas in the politics of Mexico. His second major contribution was in the development of some crucial features of the NPR and the relationship between corporatist structure and occupational groups. These relationships included those between organized labor, peasant organizations and NPR. Cardenas recognized huge labor confederations formed a section of his party and therefore required approval from the state.

On private sector, the president required firms of a certain size to business organizations started by the state while at the same time excluding them from NPR. This moves created official channels through which communication between the state and large economic and political actors was enhanced (Philip 1982, 172).

Cardenas also changed the socio-economic tone of his government so as to show favor to the interests of the working class. He handed them land and encouraged those with various discontentment to air them through legal strikes. All this changes especially on the corporatist linkages was the foundation of a more powerful, centralized authoritarian state.

Cardenas and nationalization of Mexican oil

The Mexican oil expropriation had far reaching impacts on both the international oil industry and the Mexican revolution. Cardenas presidency is credited for having institutionalized the revolution as he sought support from beyond the elite friends as Carranza had done. This was evidenced by his incorporation of the working class and the peasants into his party.

On 18th March, 1938, Cardenas nationalized the oil industry. The nationalization was a sign of a dramatic affirmation of the economic independence of Mexico from leading oil companies and their governments, a move widely supported by majority of Mexicans. Cardenas’ motives for nationalization of Mexican oil are shrouded in mystery. A similar mystery surrounds his relationships with key political insiders (Philip 1982, 201).

Implications of the constitution on Mexican oil

It is most likely that Cardenas nationalization of Mexican oil emanated from his political elites rather than from diffuse popular pressure like many would like to assert. Article 27 of the constitution framed in 1927 claimed that Mexican subsoil was a property of the nation.

This might have yielded the eventual expropriation. But oil nationalization was not all that popular during the revolutionary period. The nationalization could only have come from a small group whose tenuous roots were in the mass of the population. It is crucial to understand that Mexico was highly classed, fragmented and disunited to produce a very successful nationalism.

The nationalism witnessed during the revolutionary period had a highly conservative tone. If such a thing occurred, then it probably arose from the military nationalism. Military nationalism was encrusted in the urban middle-class sectors and was represented by the carrancism. This nationalism motivated the attacks directed towards the porfirian political system. The porifirian political system had been entrusted by earlier regimes to the development and management of economy and foreign capital (Santiago 2006, 117).

It is rational to argue that those involved in preparation of Mexican constitution were non-other than the military officers who had served under Carranza during the fight that was still going on. These military officers were somehow irritated the intervention of the US in their revolution. Just like Carranza, these military officers laid the blame on the oil companies (Santiago 2006, 118).

It is most probable that the oil companies did find it worthwhile to finance to some extent various rebel groups in their bid to control oil producing areas. This was viewed by non-financed factions as a form of political commitment by the oil companies. Although such claims may appear ambiguous, such a form of contribution could not be averted except by abandonment of properties; a highly unlikely thing for oil companies.

This involvement by the oil companies was further evidenced by their claim for a legal position. If this was respected, then these would have given them entrenched rights free from policies of the post-revolutionary government. Based on these claims, Carranza viewed the presence of these oil companies as permanent threat to his government.

His arguments were that through the oil companies, North American interests would be in operation in Mexico. He rationalized that by losing the regimes that had supported them; these companies had played a critical role in opposing the revolution and were now seeking the intervention of their governments against nationalization.

Carranza was determined to show that Mexico was free to repel or modify its laws with or without being retrospect. He was determined to prove that foreign interests ought to accommodate their activities with ‘our laws’ rather than use the influence of their own governments to force Mexico to accede to legislation convenient to them (Kirkwood 2000, 122).

The oil companies reluctantly agreed to Carranza’s proposals and remained intransigent. Consequently, these proposals were made part of the Mexican constitution of 1917. Ever since its inclusion, not a single president before Cardenas attempted to confront the oil companies. Only Carranza himself had come to that brink.

Although these companies were very strong and were backed by Washington, it is also important to mention that successive Mexican government were in weak position and thus unwilling to confront America (Philip 204).

The weakness was chiefly caused by the constant internal warfare that characterized Mexico during the 1910-1920 period and three other major uprisings against the government that occurred in 1920s. As a result, Mexican governments were supported by Washington during this period in the maintenance of domestic stability (Philip 1982, 124).

In 1919, attempts by Carranza to translate article 27 of the constitution into law faced severe opposition from these companies and the US forcing him to draw back. However, Carranza was overthrown by Obregon who showed less interest in the issue.

Towards the end of 1924 when General Elias Calles ascended into power, he showed a determination to radicalize NPR in a bid to build power to silence Obregon and reduce any forthcoming independent political mobilization. Calles, whose main initiatives appeared elsewhere, hastily persuaded the congress to make article 27 of the constitution into law.

In December 1925, Calles approved the new law. This law required the companies to seek confirmation of their holdings in Mexico which were to be handed over to the government after some time.[2] In addition to this, the companies were prohibited against seeking foreign intervention in case of a dispute between them and the government of Mexico.

The government of Washington and the companies considered this law unacceptable. After Calles, all other succeeding presidents-Portes Gil, Ortiz Rubio, and Rodriguez were revolutionary leaders with the exception of Portes Gil who was congressionally appointed (Philip 1982, 204).

By early 1930s, it had become evident that oil companies were shifting they focus to lower cost Venezuela. This was mainly because Mexican oil production had nosedived after 1926 despite continued foreign investment. By mid-1931, Mexican oil exports had reached a record low and its importance effectively lost from the international arena. Mexican oiling areas had been extensively damaged by the drilling activities of the oil companies. The economic expectation from foreign oil companies’ economic advantages dwindled significantly among Mexican officials.

The oil companies were continuously seen as enriching their home countries at the expense of Mexico. The companies were considered as holding Mexico purely as a reserve area which was held back in the interests of the international oil markets stability (Stacy 1981, 4).

The question of labor relations also emerged in the wake of early 1930s. The Mexican oil workers were initially recruited through subcontractors whom the state held responsible for the workers. Therefore, the first struggle by the oil workers was to form trade unions and to strike. These demands were constantly denied making labor relations primitive and violent (Brenner, 1971, 34).

Calles regime was the first to initiate a state oil company. The national railway was given the right to explore possible oilfields[3] close enough to the railway line. The regime went ahead to create a special agency for the oil industry. In 1934, Petromex was instituted to develop potentially oil-rich areas under government’s hands.

The main goal of petromex was to supply domestic market with cheap oil. Later in 1934, wages in the oil industry were raised. Foreign oil companies in retaliation increased the prices of oil. Local dailies then worked up violent agitation by accusing the oil companies of exploiting local consumers for the benefit of overseas shareholders. In a sequence of events, bus and taxi drivers went on a strike (Gonzales 2002, 66).

From these developments, it is clear that when Cardenas nationalized the oil industry, he only harnessed rather than created the hostility to the oil companies. But it is also true that he had a personal commitment to initiating state control in the oil industry. While giving his first report to the congress at the beginning of his presidency, Cardenas promised that his regime would intervene to bring balance in the economy of the oil industry.

He promised to helpMexico reap benefits from its oil resources which had been for a long time extracted by the companies. In the same report, the president elect promised the public that he would enact laws that were to give Mexico sufficient powers to control the development of the oil industry (Gonzales 2002, 67).

President Cardenas lamented the petroleum law of 1925 that appeared not to comply with article 27 of the constitution. It apparent that Cardenas was interested in a direct control by the state of the oil resources and would have stopped at nothing to see the oil companies kicked out.

There appears that there were certain influences by factions and tendencies within Cardenas administration that slowed down his independent preferences. There is also a likelihood that certain unforeseen circumstances which he could not control slowed him down. Other key player in Cardenas administration such as general Mugica and Lombardo Toledano were more radical in the oil related matters than Cardenashimself. Particularly, Mugica was violently opposed to all the oil companies (Jowett &Quesda 2006, 6).

A more moderate wing in the government appears to have existed that urged Cardenas to use a more moderate and gradual policies but which will ultimately lead to expropriation. A variety of unforeseen and conjectural factors were vital in the determination of the process of expropriation. Prominent among these was the mobilization of the oil workers.

Under LombardoToledano, the more than 10,000 oil workers in 19 different trade unions as of 1934 were brought under one trade union. Although the initial aim of consolidating all the trade unions was for them to rally behind Cardenas in the fight with Calles, the union continued to be important during Cardenas rule (Jowett &Quesda 2002, 7).

In July 1936, constituent labor unions met in Mexico City with the aim of drawing up the demands of collective labor contract. Although the oil companies welcomed the move, they felt that the demands were excessive.

This was what Cardenas government had planned; that the wage be set very high, not to bring equilibrium to demand and supply, but rather to echo the capacity of the oil companies to pay. In an earlier speech, Cardenas had asserted that if the entrepreneurs failed to maintain their businesses in the wake of labor militancy, the Mexican government was more than willing to do this on their behalf (Joel 2001).

Moves towards confrontation

In 1937, pressure on the oil companies continued to mount. At the beginning of the year, a draft bill was leaked to the press that revealed the government’s proposal to replace petromex with a government petroleum corporation that would take total control of the entire oil industry.

The draft further revealed that being purely government owned, the corporation would be exempted from all forms of taxes and thus be able to compete with the companies in domestic market. This move was likely to drive several oil companies out of business as they sold all their output in the local market.[4]

At the same time that the dossier was leaked, there were reports that the government was considering to further tax the oil companies. This law was considered unfair to the companies while at the same time Cardenas refuted that no harm was being done to foreign capital as the regimes decision could not result in confiscation of properties (Meyer 1977, 143). [5]

In May 1937, the oil companies offered 14m pesos against the 65m demanded by the workers. This led to a general strike that occurred at the end of May. The workers almost immediately, called on their government for arbitration. The government responded by constituting a commission of experts. This committee included Silva Hertzog, a famous oil nationalist, which demonstrated that Cardenas was looking forward to a report that would prove unacceptable to the companies.

Like was expected, the report made by the commission was provided an enormous accusation of the oil companies. The report concluded that major companies in the oil industry were foreign and that they had never at any time been connected to Mexico and thus their interests were largely foreign. It was reported that oil interests had in many times resulted in political influence both within and outside Mexico. These and many other points were challenged by the companies (Hart 1987, 549).

Among the proposals made by the commission was the inclusion of the government as an equal partner in the oil industry; a proposal which was rejected. Interestingly, in 1936 and 1937, it was the government which was pushing for nationalization, however, in 1937/1938, the companies took a more aggressive stance.

They determined to prove that the government could not handle the economic consequences of expropriation and could not also make proper use of the expropriated assets. By the end of 1937, Cardenas’ determination for nationalization appeared to have withered down as he sought agreement with the companies (Rippy 1972, 66).[6]

The expropriation

When it appeared that the companies, not the president, were seeking confrontation, Cardenas had no choice as evidenced in a speech he made on 24th, February, 1938. He accused the companies of abruptly repatriating funds and carrying out a publicity campaign to cause havoc among the businessmen. Apparent in his speech was the fact that these companies had once again raised the question concerning the sovereignty of Mexico (camp 2011, 128).

Oil companies seems to have underestimated the importance of economic factors and instead concentrated on political factors because, although the Mexican economy was in chaos, Cardenas was popular and the length of time it had taken to nationalize the industry made it politically safe.

When the move was made by the president, not a single soul opened his mouth. No one was there to save the companies and nothing less of a military invasion would have given them protection. The government of Cardenas received massive support never again witnessed in history (Philip 1982, 154).

The government took full control of the industry as the public had remained reluctant to take up their half cake in such a risky industry.

It can be argued that the oil companies led to their own death. Their ignorance was largely legendary and their loss of position was inevitable after USA became less willing to defend them every time they felt vulnerable.

Their eventual stubbornness only worked to quicken nationalization which was already in place. They never showed any willingness to respect Mexican sovereignty. There is not a single government that would stand international and diplomatic intervention in its attempts to alter regulations concerning her oil industry.

To assert that the government of Cardenas expropriated the oil companies not necessarily because it preferred confrontation to bargaining, but due to the fact that proper bargaining relationship did not exist would not be an understatement.

PEMEX petroleum is born

Nationalization meant that the government had the monopoly in exploration, production, refining, and distribution of oil and natural gas and other products. Oil companies pressed the US government to embargo imports from Mexico in a move that would discourage other states from following in its footsteps. In 1943, the Mexican government agreed to compensate oil companies with US$24m which was only a fraction of the book value of their expropriated assets.

On the other hand, Mexico was denied foreign capital and expertise for some time but the oil industry expanded at an alarming rate. Between 1938 and 1971, the oil industry grew at an annual rate of 6% with production increasing from a mere 44 million barrels in 1938 to 78 million barrels in 1951.

By 1971, the production had risen to 177million barrels with domestic consumption exceeding production. Pemex continued exploring for oil and in 1975, production once again exceeded production. The trend has continued with new plans being put in place to increase petroleum exports, enhance competitiveness and increase regional development.

Oil companies affected by the expropriation

The decree of March 18, 1938 did not affect all the foreign oil companies in the in Mexico. Companies not involved in the labor difficulties were left to continue with business. The major companies expropriated included Mexican gulf, New England, International, transcontinental, and globe petroleum. In total, there were at least forty companies whose properties were expropriated (Gordon 2 1941 45).

Although some companies were not expropriated, they still suffered as some were engaged in production and would sell the oil to bigger companies who transported and refined on their behalf. Following this dramatic move, these small companies had to cut down on production and only hoped that conditions would change for better.

The Mexican gulf was among the unaffected companies which had the largest production. This company was also a big company in the US and did not have to sell oil to the expropriated companies. The reason Mexican gulf was not expropriated remains a mystery to date (Gordon 1941, 96).[7]

Although Mexico handled the expropriation successfully than predicted, the main moral justification for expropriation never emerged. The government seems to have wanted larger profits more quickly than the companies could afford( Brid&Ros 2009, 89).

In the past three years oil production in Mexico has plummeted twenty percent due to a lack of funding for drilling costs. The Mexican government is in so much debt they cannot afford to access the reserves that are under them and are too hard headed to allow foreign investors to drill.

The current President of Mexico is Felipe Calderon and he realizes the problem Mexico is facing and tried to allow private businesses to develop refineries and pipelines in Mexico because that is one of the most expensive parts of the oil business. The Mexican Congress denied this proposal by President Calderon and they are still facing a major dilemma.

Many foreign powerhouse oil companies such as BP, Conoco Phillips, Shell, Exxon Mobil, and others have tried to lobby for the rights to drill offshore in Mexico but the nationalists in Mexico won’t allow it. This problem is going to continue for Mexico until they finally extend basic mineral property rights to the citizens of Mexico.

This will allow for private industries to get in on this massive oil reserve and not only help the Mexican economy but also help the global economy. But as of right now the Mexican government is holding a monopoly on the eighth largest oil reserve in the world and can’t even afford to tap into it.

Conclusion

A variety of reasons led to the rise of the Mexican revolution of 1910-20. The period witnessed several bloody revolutions that led to great loss of life and property. The promulgation of the constitution of 1917 had a large impact on the future of Mexico. The rise into power of Cardenas Lazaro marked yet another milestone in the history of Mexico. Cardenas finally expropriated foreign oil companies and nationalized the oil industry. The oil industry witnessed rapid growth in the initial years but the sailing has not been smooth al the way.

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Huerta was a seasoned career soldier
Originally, this would have been after 50 years from the beginning of their operation.
Oil was later found here
The government’s reaction to this leak was halfhearted.
Although these plans were not really implemented, foreign companies nonetheless felt an isolated lot
He also softened his stance in other areas
It is assumed that workers were given better pay