Petroleum

Mexican Drug Cartels Are Moving into the Oil Business

Drugs and Oil

Mexico’s infamously brutal drug cartels are targeting the country’s oil industry. In addition to running sophisticated drug trafficking routes throughout Latin America, Mexican cartels have started to exploit the country’s oil production. Besides engaging in violent assassinations and extorting countless numbers of Mexican businesses, the drug cartels have started to steal thousands of barrels of oil from Petróleos Mexicanos (Pemex), the country’s state-run oil company. A 2014 Vice News investigation concluded that as many as 10,000 barrels of oil are illegally stolen from pipelines and oil refineries in Mexico, resulting in as much as five billion dollars in lost annual revenue for Pemex. Now, instead of just engaging in violent battles with rival drug gangs, Mexico’s cartels are also fighting a battle with authorities over the control of the Mexican oil industry.

As Mexico’s drug cartels have started to infiltrate the country’s oil industry, the number of victims caught in the crossfire continues to climb. Since the oil industry is crucial to the Mexican economy, the rise in drug cartels engaging in illegal fuel theft and extortion has threatened the country’s ability to make sustained improvements in economic growth. Following a series of major energy reform laws that were enacted in 2014, the Mexican government hoped that private investment in the country’s oil industry would expand. However, as fuel theft has continued to make international headlines, private investors have become increasingly deterred to make investments in an industry that has become a target of some of the most powerful and violent organizations in the world.

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Mexico’s Oil Production Struggles

After reaching a peak of around four million barrels of oil produced per day in 2004, Mexico’s oil production has dropped by about 50 percent, with production hovering around two million barrels of oil per day (Clemente, 2019). However, even with this drop in production, Mexico is still the eleventh biggest oil producer in the world. Behind the U.S., Canada, and Venezuela, Mexico is the Western Hemisphere’s fourth largest oil producer and also still holds some of the largest untapped oil reserves in the world, with an estimated 15 trillion cubic feet of natural gas and nine billion barrels of crude oil (Harp, 2018).

While Mexico is not a member of the Organization of the Petroleum Exporting Countries (OPEC), the country has used its status within the North American Free Trade Agreement to become a major exporter of petroleum products. During the height of Mexico’s oil production in 2004, nearly 45 percent of the country’s revenues came as a result of oil production. Today, roughly 20 to 25 percent of Mexico’s federal budget comes from oil revenue (Clemente, 2019).

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Peña Nieto’s Energy Reforms

Following the steady decline of Mexico’s giant Cantarell oil field, former president Enrique Peña Nieto vowed to move forward with energy-related reforms to revive the oil industry. To enhance oil production, Mexico needed a catalyst. Peña Nieto’s two main goals were to bring in competition and capital improvements in the form of new technology and equipment to extract hard-to-reach oil reserves. Because of the growing demand for oil and gas and declining oil field production, it was essential to bring in foreign competition and new oil companies to revive the oil industry and lower energy costs for everyday consumers. Since Pemex currently doesn’t have the expertise or technology for deep-water offshore oil extraction and adequate shale gas operations, outside investment and resources are needed, particularly from U.S. oil companies. Since U.S. producers have been able to move forward with tremendous technological advancements in the oil industry, Peña Nieto strived to convince Americans to invest in Mexico.

As a result of his landmark 2014 energy reforms, Peña Nieto ended the more than 70-year monopoly that Pemex has had over the Mexican oil industry. The energy reforms also phased out government subsidies that were originally put in place to keep gas prices low. Therefore, since 2014, gas prices in Mexico have increased by an average of about 25 percent, even though global oil prices collapsed by over 75 percent during the same period of time (Stargardter, 2018). Therefore, it comes as no surprise that roughly 80 percent of Mexicans opposed the energy reforms that would allow foreign companies to control domestic oil reserves (Harp, 2018). However, because of the higher oil prices in Mexico, energy experts predicted that a vast wave of multinational oil corporations would flock to Mexico in order to take advantage of the country’s vast oil reserves. Similarly, the higher prices also attracted the attention of organized crime.

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The Drug War

Over the past 12 years, over 272,000 people have been killed in Mexico as a result of the drug war (Hackbarth & Mooers, 2019). In 2019 alone, 35,588 people were murdered, which surpasses the record set it 2018 by 2.7 percent (Sheridan, 2020). During each of the past three years, Mexico has set a new record in terms of the number of annual homicides. For several decades, the war on drugs has only resulted in more violence rather than reducing the flow of illicit substances into the United States. This war has proven to be extremely unpopular on both sides of the U.S./Mexico border. It has also become an extremely dangerous topic for journalists and politicians to counter. During the 2018 election cycle, over 100 politicians were assassinated in Mexico, many of whom spoke out against the corruption caused by the drug cartels (Harp, 2018). This corruption is thought to drain up to ten percent of Mexico’s annual GDP (Hackbarth & Mooers, 2019).

As the drug war has resulted in the deaths of countless Mexican drug lords, many of the remaining drug cartels have decided to diversify their businesses away from just narcotrafficking. The high gasoline prices in Mexico made it relatively easy for organized-crime syndicates to steal fuel and sell it at a discount. Undercutting licensed fuel dealers has been a new way that the drug cartels have made up for loses related to an increase in drug shipment seizures. Because of the drug cartels’ efforts to diversify their illicit businesses, billions of dollars worth of petroleum products are siphoned annually from Mexico’s oil pipelines and refineries.

Mexican authorities estimate that organized oil theft occurs throughout at least 22 of Mexico’s states (Jones & Sullivan, 2019). High amounts of oil theft occur in Chihuahua, Durango, Coahuila, Hidalgo, Oaxaca, Sinaloa, Tlaxcala, Querétaro, Baja California, Guanajuato, Michoacán, and Puebla. However, the highest amount of oil theft by far occurs in the states of Veracruz and Mexico State, where 44 percent and 28 percent of illegal oil taps are located (Jones & Sullivan, 2019).

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Oil Theft Challenges

The challenges related to oil theft have led to an overall decline in oil production, problems with state and economic solvency, increases in extreme violence, endemic corruption, and a growing illicit market in a less developed nation (Sullivan, 2012). In 2008, Forbes conducted the first known estimate related to oil theft in Mexico. The findings highlighted that $720 million in oil was stolen from the oil industry (Jones & Sullivan, 2019). By 2018, new estimates suggest that more than $1.6 billion in oil is now stolen annually (Woody, 2018). The Gulf Cartel and Los Zetas are two of the drug cartels that have benefited the most from oil theft. In response to the rising incidents of oil theft, President Peña Nieto ratified the Internal Security Law in 2017, which gave the Mexican military the overarching authority to police the country (Harp, 2018). However, since homicides have continued to rise with each passing year, the efforts that some describe as a form of martial law have done little to stop the violence.

Fuel thieves are known as “huachicoleros” in Mexico. According to a recent report developed by Pemex, huachicoleros drilled 2,274 illegal oil taps throughout the Pemex pipelines during the first two months of 2018 alone, which is a jump of 38 percent when compared to the same period in 2017. Furthermore, 2018’s numbers represent a 352 percent jump in comparison to 2014 (Woody, 2018). As the problem continues to get worse, Mexico’s Public Administration Secretariat has developed a special taskforce to identify those responsible for the illegal taps. In addition to the drug cartels, a number of upper level Pemex workers have also been accused of assisting with oil theft. After extensive investigation, former Pemex CEO Emilio Lozoya was accused of accepting ten million dollars in bribes related to organized crime (Woody, 2018). Interestingly, Lozoya now serves as a Mexican politician.

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High-Level Corruption

In the similar manner that drug traffickers depend on outsiders for help with their illicit activities, Huachicoleros depend on assistance from police, politicians, and insiders working within the oil industry. The rampant corruption has allowed organizations like the Gulf Cartel, Los Zetas, and Jalisco Nueva Generación to profit tremendously from oil theft. After conducting a series of intensive investigations, prominent Mexican journalist Ana Lilia Pérez says that roughly 80 percent of the oil theft is coordinated by personnel at the Pemex headquarters (Hackbarth & Mooers, 2019). The controversial reports have resulted in Ana Lilia Pérez receiving numerous death threats. She has since fled to Germany out of fear for her safety.

Corruption in Mexico has fueled both narcotrafficking and oil theft. Mexico’s current president, Andrés Manuel López Obrador, has vowed to fight this corruption. His efforts have been aimed at reducing organized crime, while also reviving the oil industry. While Mexico has historically been a major oil producer, the country doesn’t have a robust refining sector. This is one of the oil sectors that López Obrador hopes to target once corruption is brought under control. In 2018, Mexico imported over 70 percent of its refined gasoline, diesel, and jet fuel from the United States. The lack of modern refineries has limited Mexico’s ability to take full advantage of its oil and gas resources. However, continued pressure from the drug cartels has sucked the life from plans to modernize the refining industry.

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Reviving the Oil Industry

Even with the rise in cartel violence, multinational oil giants like BP, Exxon Mobil, and Royal Dutch Shell have started to open up operations in Mexico. However, conducting efficient oil operations in Mexico has been a struggle for many companies. Since 2013, Pemex has lost $19 billion annually as a result of business inefficiencies, corruption, fraud, and rampant oil theft (Harp, 2018).

Mexico’s new president, López Obrador, was elected to change the course in the country. Instead of fighting fire with fire, López Obrador has said that he will tackle corruption, address drug trafficking, and revive the oil industry with new policies rather than violence. While these policies remain to be seen, López Obrador has yet to address the Internal Security Law that was enacted by his predecessor, Peña Nieto. While this law was aimed at enhancing security, particularly for oil industry workers, violence and homicides have skyrocketed since its adoption. Moreover, the United Nations, Amnesty International, and Human Rights Watch say that the Internal Security Law is a threat to democratic society. However, when it comes to organized crime in Mexico, it’s clear that a new strategy is needed to reduce violence and save the oil industry from further damage.

Sources

Brown, J. (1993). “Oil and Revolution in Mexico.” University of California Press: Berkeley.

Clemente, J. (2019). “7 Oil & Gas Problems That Mexico Must Solve.” Forbes.

Gross, S. (2019). “AMLO reverses positive trends in Mexico’s energy industry. Brookings Institute.

Hackbarth, K., & Mooers, C. (2019). “How AMLO Is Taking on Mexico’s Billion-Dollar Gasoline Thieves.” The Nation.

Harp, S. (2018). “Blood and Oil: Mexico’s Drug Cartels and the Gasoline Industry.” Rolling Stone.

Jones, N., & Sullivan, J. (2019). “Huachicoleros: Criminal Cartels, Fuel Theft, and Violence in Mexico.” Journal of Strategic Security, 12. no. 4: 1-24.

Sheridan, M. “Mexico’s homicide count in 2019 among its highest.” Washington Post.

Stargardter, G. (2018). “Mexico’s drug cartels, now hooked on fuel, cripple the country’s refineries.” Reuters.

Sullivan, J. (2012). “From Drug Wars to Criminal Insurgency: Mexican Cartels, Criminal Enclaves and Criminal Insurgency in Mexico and Central America. Implications for Global Security.” Working Paper No. 9, Paris: Fondation Maison des sciences de l’homme.

Woody, C. (2018). “Mexico’s oil company is losing more than a billion dollars a year to cartels — and its own employees are helping them out.” Business Insider.

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