Saturday, July 26, 2008

The Stockholders of Pemex

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Energy reform in Mexico seems like a very complicated subject that only the specialized politicians and elites can understand. But fundamentally, it’s not really that complicated. The fact that Pemex, the national oil company, is failing in spite of record world market prices per barrel illustrates a fundamental and timeless principle of economics: socialism doesn’t work; it’s not a solution but rather the road to serfdom.

The United States does not have a national oil company, yet americans are not any poorer for lacking one.

President Felipe Jesús de Calderón Hinojosa is heading up the movement to reform the energy industry in Mexico, which includes the possibility of privatizing Pemex. His former rival for the presidency, Andrés Manuel López Obrador (‘AMLO’) is rallying the political left against any privatization, arguing that the oil belongs to all mexicans and that it would be robbery (or even rape) of the national patrimonio to sell shares to foreign (read: north american) companies [‘Patrimonio’ is a rich spanish word with meaning somewhere among ‘estate’, ‘inheritance’, ‘heritage’ and ‘fatherland’, in the PAT-riotic sense].

The principles of capitalism will show the way to the ecomically correct solution even if politics can always cause a derailment. Those principles are: if it doesn’t have to do with murder, assault or robbery; if has to do neither with theft, nor fraud, rape, persecution nor conspiracy, then government should not interfere. The purpose of government is to defend the rights of the citizens; rights to life, to security against the violence of other citizens or foreigners, to liberty and to property. It is not the proper role of government, with its monopoly of violence, to promote the interests of one group of citizens against those of other groups or individuals.

Therefore any activity which has nothing to do with defending the lives, security, liberty and/or property of the citizens must be located in the private sphere, that is, outside of government. To act otherwise leads by nature to the violaction of these rights and to economic inefficiency. This is exactly what we are witnessing in the energy sector in Mexico today: privileges for a chosen firm, the absence of market freedom and discipline, exclusion by force of other, non-favored participants, and a poorly-served public.

If the mexican citizens are the rightful owners of Mexico’s petroleum, as Obrador asserts, then the management and bureaucracy of Pemex is cheating these owners. These owners are not enjoying what true proprietors deserve. The management and well-connected politicians run the company for their own benefit, and the people receive no dividend save for shortages and high prices.
If the citizens are the owners of the company, then they must be given their shares of stock and their rights to buy, sell and participate in corporate governance must be implemented, just as it is for any stockholder in other publicly traded company listed on, say, the New York Stock Exchange.

Once the citizens become stockholders of a company that participates in an open and free market, and that all privileges and protections have been lifted, the majority of the political conflict will disappear, because stockholders vote primarily through their buying and selling, and thus dictate how the firm must be run. Managers and divisions that fail to operate profitably will lose their privileges and capital and investment will seek more competent ones. Stockholders will insist that management contract with partners that have the knowledge necessary to modernize the facilities and technology, and that they seek new capital. They understand that any company that fails in this will face bankruptcy. The company and the market as a whole will end up healthier and more efficient, and supplies, quality and variety of products will all increase while consumer prices fall.

AMLO wants to portray foreign companies as sharks preparing for the kill, but the economic reality is, thank goodness someone already has developed the technology and saved up the capital that can provide thousands of jobs at increasing wage rates and millions of ever-cheaper barrels of crude. All that’s required is to permit freedom of contract and to defend the property rights of owners ---- the citizens of Mexico.