The 1917 Constitution

After years of civil war the Mexican government created a new constitution in 1917. Some say, with justification, that this 1917 constitution was the first socialist constitution. It preceded the constitution of the Soviet Union by a year. Article 27 of that 1917 constitution declared that all subsoil minerals, including petroleum and other hydrocarbons, belonged to the nation; i.e., the government. Supposedly this was progressive but, in fact, it simply copied the position of the Spanish monarchs. The only differences is that the Spanish monarchs did not know about petroleum and hydrocarbons. Since these were not declared minerals the landowners before 1917 were entitled to harvest them or sell the rights to do so. The Mexican revolutionaries of 1917 were only doing what the Spanish monarchy would have done if it still controlled Mexico.

The truth of the matter is that what is labeled socialism is merely a form of feudalism. It was very natural, probably inevitable, for the revolutionaries rising to power through military action to establish a variety of feudalism once in power. The rhetorical benevolence of monarchy is no less lofty than that of the rhetoric of socialism, and the performance of socialistic government no more impressive in serving the interests of the population than that of monarchic govenment.

The 1917 constitution which declared petroleum and other hydrocarbons to be the property of the state was not enforced retroactively. The leases of oil rights to companies, even foreign companies, were allowed to stand. But land owners who had not leased those oil rights by the time of the constitution no longer had ownership of those rights. The 1917 constituition also provided for the recognition of organized labor and the right to strike. This element proved to be a crucial factor in the way in which the petroleum industry was expropriated by the Mexican government under Lázaro Cárdenas in 1938.

The Early History of the Petroleum Industry

Humans had been acquainted with petroleum, literally rock oil, from time immemorial. It was found as a seepage various places in the world. It had been used as an ointment and salve. The thicker variety and asphalt were used as a caulking. In 1826, a commissioner for a British mining company in Mexico reported that great quantities of seepage petroleum, called Chapapote, were marketed in Tampico, a town near the Panuco River in southern Mexico. It was used as varnish and to cover the bottoms of canoes. The going price was a half dollar per 100 pounds.

Colonel Drake drilled the first commercial oil well in the world in 1859 in western Pennsylvania. There had been exploitation of natural gas from drilled wells in ancient China but no prior exploitation of petroleum from drilled wells. Petroleum did show up as a nuisance in well drilled for water and there was some utilization of this petroleum as an ungent and as an ingredient in medical concoctions of dubious value.

The petroleum industry was not launched until a decline in the supply of whale oil for lamps led to a significance price increase in whale oil price. The search for substitutes for whale oil revealed that a distillate from petroleum, kerosene, provided a satisfactory fuel for illumination. It was then that the drilling of oil wells became commercially feasible.

Eight years after that first oil well in western Pennsylvania, in 1869, someone drilled a shallow, 125 foot deep, well in Mexico. Not enough oil was found to justify commercial operation. But a few years later a small refinery was built in the region to process seepage oil. Later, over the period 1880 to 1883 a Boston drilled several well in the Tuxpám region but did not find enough oil to justify commercial exploitation.

Before petroleum was discovered in commercial amounts in Mexico, Mexico was dependment upon imports of petroleum products, particularly kerosene. The importation, distribution and marketing of kerosene and other petroleum products was solely in the hands of one American firm, Waters-Pierce Oil Co. The price of kerosene in Mexico during that time was about 40 U.S. cents per gallon. This was the era of the Porfiriato. In 1889 Porfirio Díaz invited Weetman Pearson of the British construction company of S. Pearson and Sons, Ltd. to come to Mexico to construct a railroad across the Isthmus of Tehuantepec. Weetman Dickinson Pearson, was a son of one the sons of the founder Samuel Pearson.

It is notable that before it was known that Mexico had petroleum fields the government was not willing to risk public funds to explore for oil. There was too much of a risk that there wasn't any petroleum there.

The construction crews for the railroad found seepage petroleum and later the firm drilled oil wells to obtain fuel for the railroad's locomotives. That driling found oil in commercial quantities. This was in the early 1900's. Weetman Pearson, later known as Lord Cowdray, created the Mexican Eagle Oil Company (Cia Mexicana de Petroleo El Aguila SA) in 1900 which went on to become the dominant firm in the Mexican petroleum industry until expropriation in 1938. A major part of the reason for the Mexican Eagle Oil Company's success was the special favors granted to it by Porfirio Díaz before his downfall in 1910. In several Mexican states Eagle Oil had the exclusive right to explore for oil. The Mexican public benefited from the success of Eagle Oil because the price of kerosene fell from $0.40 per gallon to about $0.14 per gallon.

In 1904 the Pennsylvania Oil Co. was drilling at the shore of Lake Tamiahua, between Tampico and Tuxpám. The drilling had reached a depth of 1800 feet and the crew took a break for lunch. While they were eating the tremendous pressures below broke through into the drill hole. The gas and oil not only blew through the drill hole but created fissures around the drill hole. The gas and oil caught fire. The fire and the fissures led to the collapse of soil around the drill hole and eventually the oil derrick and all the equipment dropped out of sight into the crater which was created. The site became known as Dos Bocas, two mouths, and the cratered area eventually covered a 40 acre area. This gusher turned out to be a far greater loss than a dry hole.

The locations of the major oil fields are shown below:

When American oil companies heard about the gusher oil wells that had been found in Mexico they entered to the market by founding subsidiary companies for Mexico. Here are some of the new oil companies for Mexico:

The success of these companies can be read in the statistics on petroleum production in Mexico:

The Organized Labor Movement in Mexico

The 1917 constitution provided for the right of workers to organize. The eight-hour workday is stipulated in that constitution at a minimum wage "sufficient to satisfy the normal necessities of life." It also provided for equal pay for equal work without regard to gender, race or ethnicity, but it also provided for special protection of working women and minors. The constitution also provided for the creation of arbitration boards made up of equal numbers of representatives from management and labor with one government representative to serve as tie-breaker. Strikes were legal if they were to redress the balance of power between labor and management.

The full provisions of the constitution with regard to labor relations were not implemented immediately, but strong unions were organized in the years immediately after 1917. In particular the petroleum workers were organized.

The oil workers union did use its power to raise the nominal real wage of workers so much as it promoted overstaffing and thus the reduction of work effort, effectively raising the real wage per hour worked.

The principle of no re-election that came to prevail in the political sphere did not apply in organized labor and many of the labor union leaders continued in power for decades. Labor unions became the archetype institution for the corporatist state of Mexico.

The Nationalization of the Mexican Petroleum Industry

Lázaro Cárdenas who was President of Mexico from 1934 to 1940 was an ardent collectivist. It is not surprising that the Bolshevik Leon Trotsky chose Cárdenist Mexico as his place of refuge. Cárdenas began implementing the provisions of the 1917 constitution. He distributed 18 million hectares of land to the communal farming ejidos. This was more than all of the redistributions of his predecessors combined.

Cárdenas sanctioned the formation of a stronger national confederation of organized labor under the control of a Marxist, Vicente Lombardo Toledano. This Confederación de Trabajadores Mexicanos (CTM) is the strongest labor organization in Mexico. There is an umbrella organization Congreso de Trabajo (CT) that presides over the CTM and other unions but it is the CTM that has the real clout. The CTM replaces the older, more moderate national labor union, Confederación Regional Obrera Mexicana (CROM), as the leader of the Mexican labor movement.

The Petroleum Workers Union was one of the most powerful in Mexico. Petroleum workers received substantially higher pay than Mexican workers in other industries. A Mexican government survey in 1936 found the following comparisons:

The comparison by industry is also of interest

These were the relatively high-paying industries of the time. The petroleum industries was high above all others in the direct wage, but employees in the petroleum industry also had substantial fringe benefits that employees in the other industries did not have. These fringe benefits included: free company housing, free medical benefits for the workers and their immediate families, and schools for the workers' children. These fringe benefits had a value roughly equal to fifty percent of the wage pay.

The Petroleum Workers Union had effectively achieved a closed shop in 1934. The petroleum companies could not hire employees who were not members of the union. The company could not fire any employee without paying very substantial severance pay but the union could expel any member which meant their loss of their job with the company. This provision meant that the union officials had more power over employees than did their company employers. This provision was put into the petroleum workers' labor contract at the insistance of President Abelardo Rodriguez, the immediate predecessor of Lázaro Cárdenas.

Cárdenas reorganized the official political party, giving it the institutional structure that enabled it to rule Mexico for seventy years. Under Cárdenas' reorganization the party had four sectors: 1. Labor, 2. Agrarian, 3. Military, 4. Popular. Later the military sector was merged with the popular sector. Cárdenas renamed the party as the Partido de la Revolución Mexicana but in 1946 it was again renamed as the Partido Revolucionario Institucional (PRI). Under Cárdenas' reorganization the labor sector of the party was essentially the Congreso de Trabajo, the umbrella organization of the labor movement.

In 1937-38 the labor unions in most of the foreign petroleum companies went on strike estensibly for higher pay and more training of Mexican workers for the more technical jobs in the industry. In reality the goal was to take control of the petroleum companies. The demands of the union were so excessive that the companies could not grant them and still function. For more on the union demands.

Cádenas intervened demanding compliance with the workers demands. It is alleged that in the negotiations with the President some agreement was reached but the petroleum company representatives insisted that the agreement be put into writing. This was supposed to have impuned Cárdenas' integrity at honoring his word. Piqued Cárdenas executed orders for the expropriation of the foreign oil companies' properties. No compensation was paid at the time of expropriation in 1938 but later compensation was made at the value the companies had reported for tax purposes.

There were international protests but the nationalization of the foreign oil interests held. The cost to Mexico was not just the compensation paid. The far greater cost was the loss of sources of capital for Mexico for about twenty years. In addition Mexican petroleum production declined and at times Mexico was a net importer of petroleum. Furthermore the labor union of oil workers controlled the staffing of the national petroleum company PEMEX and vastly overstaffed it. When President Salinas in 1989 forced the laying off of excess workers the number of excess workers proved to be equal to about 80 percent of the necessary workers. So from nationalization in 1938 to the reorganization in 1989 a good share of the earnings of the national petroleum company went not to the government of Mexico but to the labor union.

Distribution of Petroleum Production in Mexico

The distribution of production among the various oil fields in the 1940's shows their relative importance. In that period it was the Poza Rica which was dominant.

The focus of the above figures is misleading. It was the Golden Lane (Faja de Ordo) which was the biggest field.

The Impact of the Nationalization

Although usually the impact of nationalization is depicted in terms of the effect on petroleum production this is not the crucial problem. The crucial problem is the effect on the development of new producing oil wells. The table below shows that in the period 1924-1926 the private oil industry was bringing in about three hundred new producing wells per year. In was about 1926 that the Mexican government began talking about controlling the petroleum industry. Immediately the exploration began to drop and continued dropping. The petroleum companies had alternative development sites in Venezuela, Colombia and the Far East that seemed safer investments. By the time the actual nationalization came in 1938 the annual development of new successful oil wells was a small fraction of what it had been in the mid-1920's. Not all of the private petroleum companies were nationalized in 1938. Only the ones which were involved in labor disputes in 1937.

The national petroleum company, PEMEX, was not notably successful in developing new wells. The problem was not that it had a lower success rate than the private companies, the problem was that it just did not drill many wells. Bureaucrats with their careers on the line have a problem with risk-taking. No bureaucrat wants to have to explain the loss of public funds in a dry hole.

After World War II the development of new wells increased from the negligible levels of the early 1940's but still the number of new producing oil wells developed in the decade after nationalization was less than the number brought-in in 1926. Although production from the wells expropriated in 1938 was maintained after a few years of declined production the nationalization during that first decade was a financial failure. Costs rose because of over-staffing promoted by the oil workers union. PEMEX had a difficult time meeting minimal financial obligations to the Mexican government.

The development of new oil wells improved in 1949 when PEMEX began contracting with foreign petroleum companies to drill under contract. The payment for the drilling was a share of the oil found. Thus the risk of drilling was shifted to the drilling companies.

(To be continued.)