Mexico's Oil-Tortilla Paradox
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Watch this brief video on the politics of ethanol and try to find the highly relevant, but omitted, fact that renders the narrator's entire thesis invalid:
It is indeed true that the U.S. government, in the name of "energy independence," has distorted the market for ethanol (actually it created the market for ethanol, since firms typically cannot produce it for less than the cost of gasoline). And it is indeed also true that, with artificially created ethanol demand for corn now competing with the pre-existing tortilla demand for corn, the price of corn (among other things) has risen, which in turn makes tortillas more expensive, which in turn is bad for lower-income Mexicans.
All true.
But here's what the video left out: Mexico is an oil-exporting country!
So if the Mexicans want to keep tortilla prices down, one way to do so would be to lower its price for oil and make ethanol too expensive (relatively speaking) for the U.S. government to bother with.
Which, of course, Mexico could do, since the video also left out the pesky little detail that Mexico's oil "industry" is a state-run, nationalized, socialist monopoly. If oil is so expensive that (subsidized) ethanol becomes a viable alternative, then where are all those "Exxon-like" profits that should also be accruing to Pemex (which, as part of the Mexican government, should be passing the profits on to the Mexican people, no?). And if Pemex is not making "Exxon-like" profits, then what does that say about the ability of socialist governments to actually run private enterprises — even relatively lucrative ones like oil?
And speaking of "the ability of socialist governments to actually run private enterprises" — Pemex is one of the most corruption-infested enterprises in the world — it loses $1 billion per year to corruption according to one estimate. Meanwhile, its infrastructure is collapsing: there's more to running an oil refinery than pushing the "On" button and opening the cash register. This is one of the classic flaws in socialist control of industrial production: the hubris of ignoring depreciation and the need for capital expenditure.
Pemex sucks in tens of billions of dollars — mostly American dollars — in revenue every year, and could suck in far more if it were run properly. Yet instead Pemex is a disaster, Mexico remains impoverished and the people, through the higher corn prices that Pemex itself contributes to, are actually worse off economically.
Welcome to classic Twentieth-Century industrial socialism. Which, in the Twenty-First Century, fails even faster and even worse.
Hopefully (but not likely), the people of Venezuela, Ecuador and Bolivia will take notice.
POST SCRIPT: One other error in the video — we are not "running out of oil." We can never "run out of oil." It is an economic impossibility to ever "run out of oil," or of anything else.
(Video via Boing Boing.) More on government interference in the ethanol market from Econbrowser.
It is indeed true that the U.S. government, in the name of "energy independence," has distorted the market for ethanol (actually it created the market for ethanol, since firms typically cannot produce it for less than the cost of gasoline). And it is indeed also true that, with artificially created ethanol demand for corn now competing with the pre-existing tortilla demand for corn, the price of corn (among other things) has risen, which in turn makes tortillas more expensive, which in turn is bad for lower-income Mexicans.
All true.
But here's what the video left out: Mexico is an oil-exporting country!
PEMEX is the largest company in Mexico and, according to the Petroleum Intelligence Weekly, in 2003 it was the ninth largest oil and gas company in the world. In the same year, it was the third largest producer of crude oil in the world.It receives about $20 billion per year in oil revenues (more than that these days, given the increase in the price of oil). That's an awful lot of tortilla mix.
So if the Mexicans want to keep tortilla prices down, one way to do so would be to lower its price for oil and make ethanol too expensive (relatively speaking) for the U.S. government to bother with.
Which, of course, Mexico could do, since the video also left out the pesky little detail that Mexico's oil "industry" is a state-run, nationalized, socialist monopoly. If oil is so expensive that (subsidized) ethanol becomes a viable alternative, then where are all those "Exxon-like" profits that should also be accruing to Pemex (which, as part of the Mexican government, should be passing the profits on to the Mexican people, no?). And if Pemex is not making "Exxon-like" profits, then what does that say about the ability of socialist governments to actually run private enterprises — even relatively lucrative ones like oil?
And speaking of "the ability of socialist governments to actually run private enterprises" — Pemex is one of the most corruption-infested enterprises in the world — it loses $1 billion per year to corruption according to one estimate. Meanwhile, its infrastructure is collapsing: there's more to running an oil refinery than pushing the "On" button and opening the cash register. This is one of the classic flaws in socialist control of industrial production: the hubris of ignoring depreciation and the need for capital expenditure.
Pemex sucks in tens of billions of dollars — mostly American dollars — in revenue every year, and could suck in far more if it were run properly. Yet instead Pemex is a disaster, Mexico remains impoverished and the people, through the higher corn prices that Pemex itself contributes to, are actually worse off economically.
Welcome to classic Twentieth-Century industrial socialism. Which, in the Twenty-First Century, fails even faster and even worse.
Hopefully (but not likely), the people of Venezuela, Ecuador and Bolivia will take notice.
POST SCRIPT: One other error in the video — we are not "running out of oil." We can never "run out of oil." It is an economic impossibility to ever "run out of oil," or of anything else.
(Video via Boing Boing.) More on government interference in the ethanol market from Econbrowser.
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Posted by Kip on
8 February 2007
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