🛢️ Oil Enterprises

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It’s the oldest debate in Latin America: just how much state presence is good for the economy?

Most modern economists agree that too much of a state role in guiding or managing a national economy can be fatal, as seen in historical examples like the Soviet Union or contemporary regional examples like Cuba and Venezuela. Too little presence, and it can be hard to rally aggregate demand or keep inflation low.

But outside of those extremes, the global economy still sees a flurry of state-owned enterprises (SOEs) and nationalized firms competing with privately-owned competitors. And nowhere is this more true than in the energy sector, in which many of the largest oil and gas companies – Saudi Aramco and Petrobras – are SOEs run by their respective countries.

Unfortunately, these can have their own issues, as the case of Pemex can illustrate. Formed in 1938 after the nationalization of Mexico’s oil industry, Pemex has long been plagued by issues relating to government management. Just this week, in fact, the world’s largest sovereign wealth fund divested its Pemex position over decades of corruption scandals.

Part of the problem is that, by having government at the table, SOEs can have market-irrational tendencies foisted upon them. Petrobras, for example, has long needed to keep domestic gas prices artificially low in order to spare the Brazilian government from the wrath of the powerful truckers’ union, which famously went on strike in June 2018.

In the case of Pemex, meanwhile, profits have often been redirected elsewhere. The company pays out over half of its annual revenues in taxes and royalties, making up roughly a third of all tax revenue collected by Mexico. Good for the federal budget—not so much for firm operations. No wonder Mexico’s production has cratered and even New Mexico outproduces it now.

In recent years Pemex has been called the most indebted oil company worldwide. Only Petroperú, its far smaller Peruvian counterpart, is in such bad shape. Meanwhile, peer SOEs in Argentina, Chile, and Colombia are doing much better fiscally.

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