How Mexico Can Save Its Oil Industry: Sell Baja California to the US

Another economic disaster looms for both the US and Mexico and something needs to be done in the near future to stop it.

Mexico is currently the fifth largest oil producer in the world and the third biggest supplier of crude oil to the United States, but production has been declining at its mammoth Cantarell oil field so drastically that the country is now expected to become a net importer of crude oil within the next four years.

Should that prediction come to fruition, gasoline prices in the United States will skyrocket and the Mexican economy would most certainly collapse.

That’s why when the Mexican government announced in 2006 that a new oil field was discovered off the coast of Mexico’s Veracruz state with potential additional reserves of up to 10 billion barrels of crude, it was viewed as welcome news by many people on both sides of the US-Mexican border.

However that good news continues to be tempered because the state-owned Mexican oil monopoly known as Pemex currently lacks the financial resources and expertise needed to exploit the newly-discovered deep water oil field in the Gulf of Mexico. The resulting capital shortage is further compounded by Mexican law, which still prohibits the foreign investment that Pemex desperately needs to extract the crude.

In 2008, Mexican President Felipe Calderon made very modest strides in reversing Pemex’s monopoly but any further meaningful reforms remain illusive. This is because most lawmakers believe a national monopoly is the only way to ensure that the majority of Mexico’s oil profits remain in the Mexican Treasury.

Mexico’s economy absolutely depends on oil exports; fully 60% of Pemex revenues are routinely siphoned off to fund 40% of Mexico’s federal budget. If Mexico’s golden goose is to be kept alive and kicking, and if America wants to avoid another potential gas crisis, it is imperative for both countries that Mexico’s nascent monster oil field reaches its full potential.

However, in light of Mexico’s reticence to foreign investment in its dying oil industry, one is left to wonder exactly how that country plans to raise the capital necessary to fully exploit the potential of its newest oil field.

Here’s a crazy suggestion: Why doesn’t Mexico sell Baja California to the United States?

The idea isn’t a new one. In the mid-nineteenth century the United States made two separate formal requests for Baja California’s eclectic array of arid desert, rugged coastline, and fertile farmland. The first came in 1848 during negotiations to end the Mexican-American War. Six years later, a second request was made to include Baja California as part of the Gadsden Purchase.

Selling Baja California now would give Mexico the capital it needs to maintain its treasury revenues, revive the health of its declining oil industry and tap the deep-water crude lying under the Gulf of Mexico sans foreign investment. In exchange, the United States would preserve a locally reliable source of oil imports and become the new owner of the third longest peninsula in the world.

“Okay, Len, so how much is Baja California worth?”

Beats me.

But, in inflation adjusted dollars, the southwestern land buy known as the Gadsden Purchase was settled for roughly $30 per acre. In The Annexation of Mexico, John Ross writes that the Reagan administration wanted to buy Baja California for $105 billion. If Ross’s account is true, the US made an inflation-adjusted offer for Baja California in the neighborhood of $200 billion. That’s $5,580 per acre.

For $200 billion Mexico would receive a significant cash infusion equivalent to roughly 20% of its 2008 GDP. Assuming up to half of that will be needed over the next decade to sustain Mexico’s domestic oil production at current levels, that still leaves $100 billion to stimulate the Mexican economy via public works projects and other improvements to the Mexican infrastructure.

For the United States, a secondary effect of the sale would be the naturalization of up to three million new American citizens that are currently residing in Baja California — many of those poor and dependent on government support. But that’s a manageable issue; after all, we’ve been there and done that already. The INS estimates that the number of unauthorized Mexicans residing in the United States increased by almost that much between 1990 and 2000.

Besides, $200 billion dollars for Baja California and stable gasoline prices seems downright reasonable considering the enormous development potential of the Baja coast. And let’s face it. What’s another $200 billion between you and me when the government has already thrown away over a trillion dollars in misguided corporate and homeowner bailouts?

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Comments

  1. 1

    says

    Your estimated cost to buy Baja, is only about 13% of our current annual budget deficit. Such a deal, if we only had the money.

    Heck, if we just let two banks, one automotive and an insurance company fail, we could probably afford the whole country. ;-)

    Seriously, Mexico is a solid ally and soon we will be more reliant on less friendly sources, like Venezuela and the Middle East for our oil. This won’t be good for Mexico or the U.S. The last thing Mexico needs is a steep drop in oil revenue. The last thing the U.S. needs is to support more unfriendly dictators.

    The demise of the Cantarell oil field is another reason we have to start diversifying away from oil use right now. Iran’s oil production is also plumetting, which could make them very unstable in the future. We may soon witness steep drops in world oil production and we still don’t seem to have a plan for this. Hybrid SUVs probably aren’t going to do the trick. We need some Hydrogen and electric vehicles ASAP.

    I don’t know why it’s taking so long to catch on to the decline of oil. It’s so very obvious.

  2. 2

    says

    Thanks for the great comments, Bret! :-)

    The $200B suggestion for Baja may seem insultingly cheap to many.

    We bought Alaska for two cents an acre, and the Louisiana Purchase for three cents per acre. In inflation adjusted terms that amounts to 29 and 40 cents per acre respectively. In light of those numbers, the proposed figure of over $5500 per acre for Baja doesn’t seem quite so unreasonable, at least from the American perspective.

    I agree with you that alternatives for gasoline need to be developed, and I am certain they will be once the economics force the issue.

    I am not sure electric vehicles are the way to go though because I see two significant problems with their application on a mass scale: 1) the current inability of the power grid to handle the recharging of all the batteries required to operate the electric vehicles, and 2) the resulting environmental problem of disposing all those batteries once they become inoperable.

    Unless we agree to increase the percentage of our current power generation currently coming from nuclear power (which I am all for), one has to question the wisdom of burning extra fossil fuels to accommodate all the new electric vehicles on the highway. I haven’t run any numbers, but I’d be interested to see how much fuel we’d actually be saving.

    My main point of this article was not to suggest a bald-faced land grab of Mexican territory. It was really to say Mexico must change its opinion regarding foreign investment within its oil industry if it wants to save it. However, if they still believe that foreign investment is unpalatable then I wanted to suggest another way they could have their cake and eat it too, so to speak.

    As always, Bret, thanks again for your great inputs! They’re always appreciated! :-)

    Len

  3. 4

    BG says

    I don’t think the 200B is insultingly cheap if it really just amounts to a sovereignty transfer. Are we letting the mexicans currently living there keep their land and also giving them American citizenship? Or are we purchasing all the land and leasing it to its current inhabitants or kicking them all out and reselling it to the highest American bidders? Really I wonder how the Bajans (is that the right term?) would vote if they were allowed to choose what country to be a part of. Current landowners would clearly be the biggest winners in a sovereignty transfer as land in SoCal currently sells for much more than land in Baja. Really the 200B would be to purchase any roads and other government land/facilities in Baja as well as Baja resources they’d be giving up. Considering most of the land there is probably in private hands, that figure may actually be kind of high. Baja (both norte and sud) does have GDP/capita above the average for Mexican states though so losing it might cost the country financially. I guess you’d have to figure out a present value for the lost tax revenue.

  4. 5

    says

    Great points all, BG! Call me crazy, but I think if a referendum was held by the Baja Californians to decide whether to secede from Mexico and become the 51st (and maybe 52nd) state of the US, they would jump at the opportunity. The land owners would be become wealthy overnight, and the poor could take advantage of plentiful American social services. I suspect, but am not certain, that such a transfer would automatically make legal residents of BC naturalized American citizens.

    As for the lost tax revenues for the Mexican treasury, that would be a drop in the bucket compared to the loss of income that would result from their oil industry continuing to crumble due to lack of capital.

  5. 6

    SideSwipe says

    Interesting….I found this site while reasearching the viability of buying land east of the colorado river through to east of Rocky point in a bid to provide water desal resources and tourism land for Arizona that would become managed by American politics instead of Mexican politics. I was operating under the assumption that the 65-70,000 residents there would become naturalized citizens (which they would be allowed to vote on) and which they they would be able to keep the current lands they own. It would be as one of the readers stated a change in sovereignty. I hadn’t been aware of the difficulties the Mexican government had been facing due to falling oil revenues, though I think the IMF and World bank would assure the continued viability of the Mexican oil industry through loans provided to build the necessary infrastructure to support the continued field development in the Gulf.
    That said, I am intrigued at the thought of adding Baja to the U.S. Imagine how happy Sammy Haggar would be. Cabo Wabo!!

  6. 8

    says

    I too think $200B is not the limit of what the US could afford to pay. They’ve wasted more than that without batting an eyelash on the recent bailouts.

  7. 9

    Bajacalifornian says

    As sudcalifornian, we love to be far from mainland mexico and far from your racist country, we are invaded everyday by mexican mainland and gringos trying to live in our paradise.

  8. 11

    China says

    Ha! And since the USA is in debt and CHINA has a lot of CASH. China can invest into oil in LATIN AMERICA!

    Look up in Yahoo: China is good news in latin america

    And good bye to USA Economy which will never be the same once China goes around latin america waving cash to invest in energy and infrastucture in latin america.

    So quit writing negative comments about Mexico or Latin America if you don’t want to lose latin american friends to CHINA

    • 12

      says

      What did I write that was negative about Mexico? All I did was state facts.

      Also, how can China invest in Mexico’s oil industry when Mexican law won’t let it? And, as of now, the only other Latin American country besides Mexico with enough oil to export is Venezuela – which will remain no friend of the US as long as Hugo Chavez remains in power.

  9. 13

    Robert Cassidy says

    Most of the wealth in Mexico is controlled by a very small minority of extremely wealthy people …They are completely insulated and isolated from the suffering and austerity of the vast majority .Their first priority is to maintain absolute monopoly control of all major sectors of the economy .Only in the wake of a severe economic collapse in Mexico might there be any prospect of sovereign transfer of territory …..with population….in exchange for money …The indigenous population of Baja would obviously be big winners ….
    Such a deal on any terms would of course be a last resort for the Mexican government .Transfers of sovereignty in the recent century have only been the by product of war … In any case , Mexico , because of its underlying problems and contiguous proximity – will be a serious ongoing problem for the USA

    • 14

      says

      I agree with you, Robert. I think the ultimate chances of any transfer of sovereignty as I suggested are slim and none. Ultimately, what is really important here is that Mexico revive its oil industry – not that the US end up with a chunk of Mexican territory. If Mexico can revive its oil industry without having to resort to selling their territory, then good for them.

  10. 17

    pancho villa says

    the only way that a transfer of sovereignty can be possible in Mexico is through war, when Mexico lost their northern territories there was a whole different scenario, in those days the U.S. empire was in expansion, nowdays the U.S. economy is stagnating. Historically Mexico has always refused to sell land, so U.S. had to acquire the northern territories of Mexico as a spoils of war. Come on, let us be good neighbors!

    best regards from Ensenada

    • 18

      Len Penzo says

      I am being a good neighbor, pancho! It’s only a suggestion, not a demand. :-)

      By the way … Mexico has sold land to the US before — the area that became part of the Gadsden Purchase — so there is precedence.

  11. 19

    says

    i am from baja california to be exact from tijuana and there is a sentiment of independence from the people in the mayor cities in the baja we whaNT TO GET RIDE OFF MEXICO BECAUSE OF THE OPRESSION BECAUSE MEXICO ITS UNFAIR OUR CITIES ARE NOT WELL BUILT WE LACK OF IMPOSING HIGH RISES AND TROLLEYS WE ARE TIRED OF THE MEXICAN GOVERMENT NOT RUNNING THE BAJA CALIFORNIA THE RIGHT WAY THE WEALTH OF MEXICO DOES NOT GET SPREAD FEARLY WE ARE HARD WORKING PEOPLE AND WE WANT DEMOCRACY NOT IMPOSITION OF ENRIQUE PENA NIETO ITS NOT FEAR WE LOOK AT CALIFORNIA AS A ROLE MODEL WITCH ITS MEXICO NIGHTMARE THE NEW MEXICAN LABOR REFORM ITS TO INSLAVE PEOPLE THE MINIMUM WAGE ITS 60 CENTS AMERICAN DOLLAR NOW THEY ARE TRAYING TO CHANGE THE NAME FROM THE UNITED STATES OF MEXICO TO SIMPLY MEXICO BECAUSE THEY KNOW THAT STATES CAN SUCCED FROM THE UNIONS AND IF ITS SIMPLY MEXICO IT WILL BE A SUPER STATE. CURRENTLY EVERY STATE IS FREE AND SOVERIG THATS WHY WE THE PEOPLE OF BAJA CALIFORNIA NEED THE UNITED STATES TO HELP US FREE THE BAJA CALIFORNIA PENINSULA FROM THE OPRESSION TEXAS GETTING OUT OF THE USA ITS NOT THE RIGHT THING TO DO THE UNITED STATES NEEDS TO EXPAND IN CASE OF CIVL WAR THATS WHAT HAPPENED LAST TIME MEXICO WILL NEVER WIN ANY WAR AGAINST THE USA IF THE WHITE HOUSE GETS ENOUGH PETITIONS IN THE MEAN TIME BAJA CALIFORNIANS WILL FIGHT FOR ITS FREEDOM!!! LONG LIVE BAJA CALIFORNIA!!!! THE STAR BY THE OCEAN!!!

  12. 22

    Jal R says

    Your proposal, although perhaps controversial is something that i have thought about now and then.

    Mexico is going right now through a major political setback as the opposition that used to rule the country for about 70 years has gotten back to power, and needless to say the people of Mexico has had a rude awakening and a sound reminder of how that was not very good for the ever growing poor, mid-low socioeconomic sectors.

    The incumbent Mexican president Enrique Peña Nieto has been vilified over his alleged criminal supporters, release and pardon of notorious organized crime members tied to his political party and lately due to his imposition on reforms regarding education, energy resources and fiscal matters. Needless to say, change is never very welcomed and less even on such a rough, imposed change to the poor sectors (read: 80-90% of the countries population) of the country.

    As a foreign national born and raised in Baja California now living legally in the US as part of the technology workforce, i have some perspective on how the acquisition of Baja and its people wouldn’t be an unwelcome change or a relatively painful process (most of Baja’s youth already have a lot of the SoCal culture ingrained, as one would imagine for a bordering state), regardless of some “traditionalist” may say otherwise. Hell, people risk their lives everyday crossing the border just to get a shot at an uncertain better future than living in Mexico.

    Limited as my knowledge on the issue may be, i think Baja’s incorporation to the US would be a viable and overall welcome solution.

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