5: Mexican Oil and Nationalism
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The oil that President Cárdenas expropriated had gushed forth in an astonishing
bonanza, but it was owned and manipulated by foreigners. It enriched Europeans and North
Americans but did little more than corrupt Mexicans. The foreign operators bribed Mexican
officials, evaded Mexican laws, and persuaded their own governments to coerce Mexico City.
Mexicans learned to bristle when foreigners talked about Mexican oil; Mexicans bristled
and made oil a state enterprise in 1938. They bristled again when the United States showed
great interest in the great oil strikes of the 1970s.
Early Oil Production
Chapopotes were stinking tar pits ; and oil seeps where villagers went to make
medicines, magic potions, and adhesive pitch. That those seeps were potentially black gold
Mexico City knew late in the nineteenth century. The frenzy over petroleum in the United
States was reported by Mexico's ministers in Washington and by the press and the business
community, but it was merely one more resource that Mexicans could not develop. So, when
foreigners came to probe around the chapopotes in northeast Mexico, the government granted
permission and privileges. It was not that Mexicans were unaware of the dangers of foreign
exploitation; they leapt to the eye. But Mexico needed foreign capital, so the dangers
were weighed against the advantages. Thus, the dictator Porfirio Díaz (1876-1911)
promoted economic modernization by favoring foreign capital, which poured into Mexico,
especially from Britain and the United States.
Among the attractions were changes in 1884, 1892, and 1901 in the mining laws--from the
Roman system of reposing subsoil rights in the state, to be doled out on concession, to
the Anglo-American system of giving landowners mineral rights also. Britons and Americans
who went into mining and petroleum exploration in Mexico after 1892 believed that the law
had achieved perfection, and conveniently forgot that some countries accepted the Roman
theory as socially desirable, so that a barren plain bought at sheep pasture prices could
not confer mineral fortune upon a merely lucky owner.
At the time Díaz made these concessions, some Mexicans criticized the lack of controls
and the excessive privileges for foreigners that were part of the system. That was a
natural reaction, and it had some small effect in the nationalization of part of the
railway system late In the Díaz years. But fundamentally, nascent nationalism was no
match for foreign capital and its allies in Mexico before the great revolution of 1910-17.
In the 1890s American and British interests became active in Mexican petroleum
exploration. Edward L. Doheny of the United States and Weetman Pearson (Lord Cowdray)
struck it rich just after the turn of the century. They were bitter rivals, unscrupulous
in their dealings with each other and with Mexicans, and prone to bring their home
countries to their support. At first, however, it was scarcely necessary to beg diplomatic
intervention, since the Díaz government was generous to the companies.
Tampico on the northeast Gulf coast was a boom town of the new industry. The
town--17,569 population in 1900 and 44,822 in 1921--sat at the mouth of the Pánuco River
as it emptied into the sea. It was tropical, hot and steamy, dirty, pest-ridden, isolated,
ugly, and generally primitive. Crude and specialized labor poured in from abroad and from
the adjacent countryside.
Peasants in rough off-white drawers and shirts, straw hats, and sandals rubbed
shoulders with tool-dressers from Texas, accountants from London, bar owners from Mexico
City, and whores from all over. At one time there were some five thousand foreigners in
the seamy little tropical town. Most of the oil was produced from a strip running about
seventy-five miles south of Tampico. The companies dredged the bar at Tampico and built an
intercoastal canal south from the town into the oil fields and moved oil by barge. It was
stored at Tampico in wooden tanks and in artificial lakes and filled the air with the
smell of tar. Ships came for oil and brought food, equipment, and luxuries.
Each company had a narrow gauge railway from Tampico to the fields. There also was a
Mexican national rail connection with the interior, but it was slow and inconvenient. Road
transportation scarcely existed, although Doheny was a pioneer in selling his product for
Mexico did what it could to extract benefit from the petroleum industry through taxes
(low), bribes, and the conversion of many Mexican locomotives to petroleum. Blackmail by
local political bosses (caudillos or, caciques) was commonly used to ensure
supply routes, protect workers in the bush, and prevent theft or sabotage of
installations. But Mexicans in government and private enterprise were poorly trained,
unorganized, and left all alone to deal with the international petroleum giants, by now
well equipped to repel the feeble efforts of underdeveloped countries.
Mexican oil production rose from an insignificant amount in 1901 to 12.5 million
barrels in 1911, and much more thereafter. Most of it was exported. With world petroleum
consumption constantly rising, Mexico's prospects for large oil profits seemed rosy.
Although to the developed nations Mexico in 1910 never had seemed more stable and
prosperous, a few intellectuals and dissident politicians there were planning revolt and
the masses of peasants and laborers were quiescent only under the lash. When the
dissatisfied toppled the old regime by violence in late 1910 and early 1911, the country
fell into a series of civil wars as leaders, interests, and ideas competed for control of
a country more than three times the size of France, though with only 15 million
Foreigners in Mexico suffered much destruction of their property as well as injury and
death. No government was firmly in control of the country from 1910 to 1917, so that
foreign interests could not be well protected. Furthermore, it often was uncertain where
protests from abroad could most effectively be lodged. The foreign oil operators naturally
feared damage to their interests in the northeast. At the beginning of the movement
against Díaz, the British suspected that the United States was aiming at a protectorate
over Mexico, something London had feared for nearly a century. Although that view later
was shown to have been erroneous, at the time it stimulated British fears of danger to all
their holdings in Mexico. A report circulated that the revolutionary Francisco Madero
received financing from Standard Oil Company, with the aim of damaging British petroleum
interests that were favored by the Díaz regime. That report was never proven. Possibly it
sprang up almost spontaneously because ruthlessness was normal--and probably necessary--in
international oil rivalry.
As events proved, the oil companies were less affected by the Revolution than they
feared. Their relative isolation in the Tampico-Tuxpan area was an advantage. It was
remote from the large-scale military activity of the times. It was difficult for the
armies that took and retook Mexico City, more than two hundred miles away, to levy tribute
in the petroleum fields. Much of the time the oil area was controlled by Manuel Peláez, a
regional leader with his own army and whose family held big estates in the state of
Veracruz. With little zeal for social reform but a large appetite for money, Peláez was
happy to sell protection to the oil companies. Even when a supposedly national government
controlled the town of Tampico, the producing oil wells were in the back country, which
was controlled by Peláez.
Under these conditions, oil production continued to rise, spurred by the advances of
the automotive age and by World War I. Mexican oil helped fuel the allied fleets. The 12.5
million barrels of production in 1911 became 193 million by 1921, by which time Mexico was
the world's second largest producer (after the United States), turning out a quarter of
global production. Mexico held that second position from 1919 to 1926. The world needed
oil; various Mexicans needed revenues from oil, which was mostly exported; and virtually
no one was interested in the control of foreign enterprises in a time of civil war.
U.S. relations with Mexico during the great revolution were profoundly disturbed by
many issues but little affected by the oil industry. That was not the issue, for example,
in April 1914, when American sailors in Tampico were briefly arrested by soldiers of the
forces of Victoriano Huerta, president in Mexico City, but far from ruler in all the
country. The administration of Woodrow Wilson seized on the incident as a means of putting
pressure on Huerta. Wilson, with good reason, regarded Huerta as the murderer of his
The absurd squabble over the sailors at Tampico quickly escalated into a large dispute,
and in the course of a few days the United States had landed troops at Veracruz. There
they killed some Mexicans and remained in uncomfortable possession of the main port of
Mexico until November, long after Huerta had fallen.
The Mexican Revolution went on and on thereafter, with the forces led by Venustiano
Carranza gradually winning, so that Wilson faced a chief executive in Mexico that he liked
little better than Huerta. Carranza's "fault" was that he would take no orders
or suggestions from Wilson or accept any U.S. intervention in Mexico. But Wilson's
unhappiness at the rise of Carranza was muted by American involvement in World War I and
the peace thereafter. Mexico now seemed a sideshow to Wilson and most Americans.
Revolution and Foreign Producers
There were a few Americans, however, including executives of the oil companies, who
thought Mexico more than a sideshow. That was founded first of all on the fact that
various revolutionary leaders, including Carranza, occasionally issued reform decrees that
seemed to threaten private property in general and foreign property in particular. That
concern became vastly greater in 1917 when a constitutional convention produced a document
providing for severe restraints on private enterprise and foreign property owners.
The Mexican constitution promulgated in February 1917 was socially and economically the
most radical in force in the world. It gave a social definition to property, gave
organizational and social rights and benefits to organized labor, and contained much
nationalism on political and economic subjects. The national government was given control
of subsoil riches, agricultural estates were to be broken up and village communal lands
enlarged, foreigners were not to own land within sixty miles of the frontiers or thirty of
the seacoasts, aliens acquiring land had to promise to abide by Mexican law and forego
appeals to their home governments. There were extensive provisions authorizing labor
unions, the right to strike, employers' liability for accident and disease, minimum wages,
time limits on work, child labor reforms, and many other matters.
With promulgation of the Constitution of 1917, and especially after the fears
occasioned by the faraway Russian Revolution of 1917, many supporters of private
enterprise in Mexico and elsewhere began inveighing against "Red Mexico." That
was a cry heard frequently for more than two decades, and was a favorite charge of
spokesmen of the foreign oil companies in Mexico.
Although President Carranza, inaugurated in May 1917, was a conservative on many
subjects, he was a strong nationalist. In April 1917, as provisional president, he put a
10 percent tax on oil production. Then in June he refused drilling permits for leases
acquired after February 5, when the constitution went into effect. From then until the end
of his administration in 1920, Carranza issued other decrees that increased national
revenues from the oil companies and threatened their leases. But because Carranza's policy
was somewhat ambiguous and because production was needed during World War I, the oil
companies protested but kept at work.
President Alvaro Obregón (1920-24), the greatest military commander of the Revolution,
came to office as the United States was suffering from the "Red Scare" of the
postwar years. This search for communists in America reinforced the claims of
those--including oil company spokesmen--who said that communism must be put down in
Mexico. The United States refused to recognize the administration of Obregón. That was a
powerful and frequently efficacious weapon when used by a great power against an
underdeveloped and unstable country.
Although nonrecognition was intervention in Mexican affairs, Obregón swallowed his
resentment. He needed recognition to avoid the belief among domestic opponents that revolt
might be supported by Washington; and he needed it internationally for credits to rebuild
Obregón tried to reassure the United States with promises, but Washington feared any
Mexican agreement less binding than a treaty, possibly overestimating the inviolability of
the latter. Obregón in 1921 and 1922 had the Mexican Supreme Court declare that if the
owners of oil leases had performed a "positive act" to develop their properties
before the constitution went into force, they were ensured possession. The smaller oil
companies and other business interests were largely in favor of acceptance of this
assurance, but the State Department held out.
The problem was then taken to the Bucareli Conference in Mexico City, May-August 1923.
Agreements were reached on a number of matters unrelated to oil, and on the latter Mexico
offered a "gentleman's agreement" to adhere to the doctrine of positive acts.
With that, the United States recognized the Obregón government. Mexico, of course,
considered that it had been coerced, yet it was a good guess that some future government
would argue that such an agreement need not be honored.
Although the Bucareli agreements helped secure a friendly U.S. government attitude
during the Adolfo de la Huerta rebellion in the winter of 1923-1924, the leaders of the
Mexican Revolution perceived significant American business support for the conservatives
supporting the rebellion. The nationalistic distaste of the leaders of the Revolutionary
faction for foreign business thus was further stimulated.
At the same time, the foreign oil companies were converting their leeriness of the
political climate in Mexico into a drastic decision to damp down production there. It was
easy to do that because other oil producing countries (notably Venezuela) were coming on,
where political conditions were more favorable--that is, local nationalism was feeble.
That was the sort of global decision the oil giants could make and against which the
underdeveloped country--in this case, Mexico--ordinarily had little defense.
The Plutarco E. Calles administration (1924-1928) did little to reassure the petroleum
companies. Calles supported organized labor in a way that frightened all private
enterprise operating in Mexico. Businessmen exaggerated the immediate consequences to
themselves of Calles' labor policies. but they were right in interpreting them as
portending a long-term increase in the bargaining power of labor.
In December 1925 Calles had Mexico's congress pass a petroleum law that declared
possession of oil holdings acquired before 1917 would be limited to a total of fifty
years. Since this violated the Bucareli agreement, various U.S. officials, private
enterprise spokesmen, and journalists protested. But President Coolidge and the American
public were against intervention.
State Department officials generally were disillusioned with American interventions in
the smaller Caribbean countries since 1904. During most of the years of controversy in
Mexico, 1917-1938, the petroleum companies were dissatisfied with the State Department's
views on the Mexican situation. Nor were the companies happy about U.S. banks, which
preferred compromise with Mexico rather than confrontation, so that they could get some
return on defaulted bonds. The State Department quite properly concerned itself with the
totality of American interests rather than with single interest groups. It is not true, as
the legend has it, that the State Department jumped when Standard Oil yelled,
In the summer of 1927, in an effort to calm various disputes with Mexico, Washington
sent Dwight W. Morrow to Mexico as ambassador. Morrow proved a brilliant choice and helped
quiet Mexican fears. President Calles thereupon helped persuade the Mexican Supreme Court
to reaffirm in November 1927 the doctrine of "positive acts." Then Calles had
the petroleum law altered to incorporate the court decision by January 1928. After that,
the State Department in Washington announced that oil problems now would be left to the
Mexican courts. That was what the Mexicans wanted, but it was far from the desire of the
The companies did not abandon Mexico, but they did not lavish attention on it. From the
peak production of 193 million barrels in 1921, Mexican output declined to only 33 million
in 1931. A small rise occurred in the later 1930s, but, as it turned out, the production
record of 1921 was not to be equaled until 1973!
The Expropriation of 1938
From 1928 to 1934, Calles was conservative boss of country. Mexico, managing three
successive presidents of the country. During that period, about two-thirds of the oil
companies received government confirmation of their holdings, although all of them
disliked the very theory of reconfirmation. The six-year lull in the petroleum fight ended
with the 1934 election of Lázaro Cárdenas to the presidency.
The new president, inaugurated in 1934, was intent on reform of all sorts. His
administration took a stronger line on most of the revolutionary aims, including foreign
holdings in Mexico. It very soon ended issuance of confirmatory petroleum grants. It also
created Petróleos Mexicanos (PEMEX) as a state oil enterprise, an action that coincided
with a vast extension of the communal ("ejidal") farm system. Both acts seemed
clearly socialist to international and domestic private enterprise.
Cárdenas also greatly increased labor organization and improved its position in the
political process, integrating the unions into a revised national party. In early 1936, as
a part of the improvement of organized labor, various unions (sindicatos) joined
in the Petroleum Workers' Union of the Mexican Republic (STPRM). This was part of the huge
new national labor organization Cárdenas put together--the Confederation of Mexican
Workers (CTM)--under the direction of the left-leaning Vicente Lombardo Toledano.
STPRM later in 1936 sent to the oil companies a contract to govern the entire industry.
That sort of industry-wide collective bargaining conformed to the Mexican Labor Code of
1931. The oil companies rejected it because they preferred to deal with workers as part of
a fragmented labor system. The American companies also rejected it because at the same
time new national unions in the United States were fighting for industry-wide bargaining.
American private enterprise considered itself under siege.
The contract drawn up by STPRM in 1936 was offensive to the foreign oil companies for
other reasons as well. It demanded the closed shop, inclusion of office workers in STPRM,
higher wages, strike pay, double pay for overtime, paid vacations, and other benefits. The
companies did not want to agree to those things in Mexico, nor did they want news of such
heresies to reach Venezuela and other producing "colonies."
Before the industry could be disrupted, Cárdenas in November 1936 imposed a six-month
cooling-off period. The companies then agreed to industry-wide bargaining and contracts
and some increases in compensation, but the concessions were not enough for STPRM. The
union in mid-1937 obtained government approval of definition of the dispute as an
"economic conflict." The law considered that to be a condition requiring
government intervention to arbitrate and then make and enforce a decision--not a pleasing
prospect to the companies.
It meant that the Cárdenas regime appointed a Federal Board of Arbitration and
Conciliation, more of the government intervention that private business so much lamented.
The experts used by this board declared that American companies made much higher profits
in Mexico than in the United States, thus they were exploiting Mexican workers. That was
something that Mexican nationalists believed of all private enterprise in Mexico.
There followed the expectable dispute over profits. In December 1937 the Federal Board
ordered wages increased by 27 percent, a forty-hour week, office personnel included in the
union, and various fringe benefits. The companies took the matter to the Mexican Supreme
In the United States, the oil companies and supporters tried to pressure the federal
government and met with little success, partly because the country had an increasing
interest in good relations with Mexico, and also because of the rise of fascist Germany,
Italy, and Japan. It seemed to some leaders that the world faced an uncertain and
The Mexican Supreme Court in March 1938 rebuffed the oil company pleas, whereupon the
companies raised their wage offer but coupled it with demands that no more should be
requested. When no agreement was reached, the Board of Arbitration declared the companies
in "defiance" (rebeldía), a state that permitted worker control of
private enterprise. That led the largest oil producer, "El Aguila," a subsidiary
of Royal Dutch Shell, to consider capitulation; but it was persuaded by the American
companies not to give in.
The latter, however, had badly miscalculated the force of the new Mexican nationalism.
It also had overestimated the willingness of the American government and people to pull
business chestnuts from overseas fires. It was a period in which Roosevelt's New Deal had
promoted harsh opinions of the selfishness of large corporations. And the fascists abroad
had arms in their hands, more worrisome than wage disputes in Mexico.
The result was that when President Cárdenas, on March 18, 1938, declared the
nationalization of Mexican petroleum, the official U.S. response was only a tepid
disapproval. Since Cárdenas promised compensation to the oil companies, many official and
private groups in the United States could accept the expropriation as legal. The British
government inveighed against the seizure as improper, and Mexico broke relations with
London in May 1938.
The oil companies themselves did all in their power to punish Mexico economically. They
had a number of weapons, including control of tanker fleets, distribution systems, and oil
production equipment. They managed to stop U.S. Navy purchases of oil from Mexico. They
urged American tourists not to go across the border. Mexico compensated to some extent
with increased relations with Italy, Germany, and Japan-a development worrisome to many
Negotiations between Mexico and the companies made no headway immediately after the
expropriation because the companies refused to yield, still fearful of the effects in
other lands. A minor company, Sinclair, did conclude an agreement with Mexico in 1940,
renouncing most of its claims.
[1997--The Mexican government defended its actions in 1940 with the following document
(original pagination maintained):
A STATEMENT BY
THE BUREAU OF INFORMATION
OF THE MEXICAN GOVERNMENT
Distributed by the
CONSULATE GENERAL OF
MEXICO IN NEW YORK
70 PINE STREET
NEW YORK, N. Y.
Printed in U.S.A.
The Standard Oil Company of New Jersey has distributed a
booklet under the title of "The Mexican Oil Seizure", with the
manifest purpose of conveying to the mind of its readers the
impression that the government of Mexico, in expropriating the
properties of the oil companies, has acted in violation of the
laws of Mexico and of the principles of International Law; and
also, that in the negotiations conducted with some of the oil
companies for the purpose of finding a solution to the problem,
the Government of Mexico, from motives which are likely to be
misunderstood, has repudiated its offers formally propounded,
thereby making impossible any kind of settlement.
Out of respect for public opinion we will set forth in a sub-
sequent special publication the misrepresentations and erroneous
interpretations made by the Standard Oil Company in its pamphlet
as to the origin of the dispute and as to the negotiations in which
the agents of the expropriated companies participated.
For the time being, reference will only be made to the chief
misrepresentations which are found in the booklet:
It is stated that the oil companies had an investment in
Mexico of several hundred million dollars and that the Mexican
Government has admitted its financial inability to pay. The con-
clusion drawn in the pamphlet is that the companies had no other
recourse than to request diplomatic protection from their own
governments in support of their claims. These arguments are
based on the contention that Mexico could not legally expropriate
the properties because of its obvious inability to pay prompt and
adequate compensation to the owners. The conclusion is false,
because it is based on two premises both of which are equally
a) It is not true that the value of the properties of the oil
companies lies between 262 million dollars as a minimum
and 500 million dollars as a maximum, as is alleged in the
pamphlet. Such figures were taken, as therein stated, from an
article published in the magazine "Hoy" of July 31, 1939, the
author of which is Mr. Luis Cabrera, an attorney of Mexico City.
As an instance of the hasty manner in which the writer of
that pamphlet proceeds in attempting to establish his assertions,
a literal translation of what was really said by Mr. Cabrera
"I shall therefore take at random 300 million dollars as
representing the value of the various properties of the 17 com-
panies, the expropriation of which has been decreed; and I shall
fix the further sum of one hundred million dollars as the value
of the properties that must yet be expropriated in order to com-
plete the socialization plan of the oil industry. The total, there-
fore, is four hundred million dollars which Mexico must pay,
theoretically, right down and in cash. If anybody was to tell me
that this figure is arbitrary, I would answer to him that indeed it
is, and that it is devoid of any scientific basis; but that all the
other figures which are mentioned are just as arbitrary, etc...."
The writer of the article published in "Hoy' simply figures
the sum of 262 million dollars as within Mexico's capacity to pay.
The Mexican Government characterizes as enormously ex-
aggerated the figures which the companies have spread abroad
regarding the value of their properties. Inasmuch as there has
been no appraisal up to the present time, the only basis available
for valuation is the company's own figures in the company's own
books. According to the consolidated balance sheets of all the
expropriated companies on March 18, 1938, the value of their
permanent assets in Mexican pesos, amounted to 112,899,890.44.
It seems proper to point out that in this figure the American
interests represent only a very small part of the total capital
investment as well as of the actual production, because those com-
panies, bent upon amortizing their capital, limited their activities
to exploiting wells already in operation, Without undertaking by
means of new investments to increase production, or even to
maintain the level previously reached. It is a matter of public
knowledge that the production of the American companies reveals
a definite decrease, owing to a complete absence of exploration
and exploitation works of any importance, as well as to the re-
duced activity of their refineries, pipe lines and other installations.
The companies have systematically refused to discuss the
value of their properties. Their representative admits that he
proposed during the negotiations with the Government that the
question of appraisal should not be considered. Such an attitude
on the part of the companies is due to the fact that since they can
not deny our right to expropriate private property with, naturally,
payment of just compensation, they are actually seeking to create
the impression that Mexico could not lawfully carry out the
expropriation because of its inability to pay the fantastic sum of
millions of dollars which the companies arbitrarily and premature-
ly assigned to their properties.
b). It is not true that Mexico has recognized her inability
to pay, but, quite to the contrary, the Mexican Government has
repeatedly declared its willingness to pay to the companies the
full value of their properties. The assertion of their represen-
tative that the Government of Mexico promised to pay compen-
sation to the companies with only a part of the net proceeds from
the oil operations of the expropriated properties, is likewise un-
true, for the Government has declared on different occasions its
willingness to place at the disposal of the companies a substantial
part of all the oil products destined for export, namely, a portion
of the total production, including the oil reserves which belonged
to the Government of Mexico prior to the expropriation and
which have a great potential and actual value.
The fact that Mexico has suspended payment of its foreign
debt does not mean, as is suggested in the pamphlet, that Mexico
is unable to pay for the oil properties which were expropriated,
inasmuch as it actually has at its disposal, an industry obviously
productive, the income from which shall be devoted preferentially
to the full payment of the compensation.
Among the most important nations of the world there are
many who have postponed payment of some of their obligations,
and it has not yet occurred to any one to say that such countries
are actually suffering a permanent incapacity to meet their ob-
The pamphlet makes reference to the compensation to Amer-
ican citizens for the value of their agricultural lands. In this par-
ticular it is pertinent to point out that an agreement has been
reached with the Government of the United States whereby a
commission has been created and is already functioning and that
the Government of Mexico is making annual payments even be-
fore the exact value of the lands has been finally determined.
In the pamphlet an incomplete and malicious narrative of
the oil controversy is given, misrepresenting the facts in order to
fit them to the conclusion which is sought to be reached, and
which conclusion is that the Government of Mexico always en-
tertained the avowed purpose of expropriating the oil companies,
taking advantage of various events in the accomplishment of
that purpose. The evidence justifies no such conclusion.
It is true, as it is stated in the Standard Oil publication,
that the oil companies were always the object of spirited attacks,
they being considered as the exploiters of the natural and human
resources of the country. In this connection, it should be remem-
bered that the agents of the oil companies, over the years, com-
mitted countless rapacious acts such as defrauding the national
treasury, bribing officials, seeking to impair the political stability
of the government, and that they even made attacks against
private property and human life. In fact, they went so far as to
disturb at times the friendly relations between the peoples and
the governments of the United States and Mexico.
It is also true that the aim of the various Governments of
Mexico in the last few years was to place under the control of
the Nation, for the benefit of the Mexican people, this important
industry on which the national economy depends to a large extent.
The methods employed by the oil companies and their attempts to
create a political and economic power stronger than the State
itself, were deemed prejudicial to public policy in Mexico. Various
Mexican administrations, including the present one, have had the
purpose in mind of accomplishing such an aim through a slow
and gradual process, by creating a national organization to unde-
take the exploitation of the national reserves, and then gradually
increasing the production of the oil lands. This plan was already
being developed and important results had already been obtained
when the expropriation took place.
Why was the Government compelled to change this plan and
to decree the expropriation, placing all the oil properties in Mexico
in the hands of a governmental institution? An examination of
the events which preceded the expropriation proves that the pre-
sent Administration had no other course open to it but the one it
actually followed, thus being obliged to give a different direction
to its policy from that originally intended. These were the actual
I. The workers demanded from the various companies
operating in Mexico a revision of their labor contracts. This was
a spontaneous act on the part of the labor unions and constituted
a normal request, normal not only in Mexico, but in all other
countries where the workers are granted freedom and where the
workers' right to organize themselves for the defense of their in-
terests is recognized.
II. In view of the fact that the Unions and the companies
could not come to an agreement concerning the conditions of the
new contract, the workers chose to declare a strike. This is, also, a
spontaneous act on the part of the workers and, likewise, a lawful
act in any country where the right to strike is recognized.
III. Inasmuch as the strike last for some time and there
was no indication of an early agreement between the parties to the
controversy, and furthermore, as due to the lack of fuel caused
by the strike, it was feared that all economic life in Mexico would
be paralyzed, the Mexican Government deemed it its duty to
intervene in the dispute, in order to bring about a rapid solution
and to prevent a grave danger to the entire Nation. This was
the first official or governmental action taken by the Mexican
authorities in the controversy between the companies and their
IV. After an unsuccessful attempt was made, first through
the Department of Labor and afterwards by the President per-
sonally, to obtain a conciliation between the parties, the President
suggested to the workers that they should return to their work
immediately, and submit their case to the Board of Conciliation
and Arbitration which is located in the City of Mexico.
The intervention of the Mexican Government to that end is
beyond reproach, from any point of view whatsoever, and was
inspired by the highest regard for the public interest.
V. The Board of Conciliation and Arbitration appointed
a committee of three experts to study the different aspects of the
dispute. After having heard a considerable number of expert wit-
nesses on the questions submitted, chosen both by the companies
and the workers, the committee produced a comprehensive and
well-reasoned report which served the Board as the basis for its
VI. It is not true that the award rendered by the Board of
Conciliation and Arbitration conceded to the workers their full
demands. The Board took a reasonable course between the de-
mands of the labor organizations and the concessions the com-
panies were willing to grant. The award, based on the reports
of the experts, decrees that the companies must guarantee certain
benefits to the workers, by way of increase of wages, medical
attention, hygienic dwellings, vacations, payment for extra-time,
extra payment for labor in unhealthy regions, etc., amounting to
the sum of twenty-six million Mexican pesos, in addition to the
amounts covered by the former pay schedules of the workers.
The statement made by the representatives of the companies
that the net profit of all the said companies amounted to twenty-
three million pesos is false. The experts showed that the com-
panies had previously earned much higher profits and the Mexican
Government, which now controls the oil industry, is in a position
to declare that the assertion made by the experts is fundamentally
VIII. As soon as the decision of the Board of Conciliation
and Arbitration was known, the companies announced both
in the American and Mexican press, that they were not
willing to submit themselves to the decision of the Board and
that in case the Supreme Court of Justice, to which they had
already appealed, did not grant the application for a review of
the award rendered by the Board of Conciliation and Arbitration,
they would abandon their fields, plants, and equipment.
The Supreme Court, after a careful study, held that the
decision of the Board did not contain any constitutional violations
and that, therefore, it could not be reversed.
VIII. Both before and after the Court rendered its decision,
several efforts for conciliation were made by various high officials
and even by the President himself, offering fair and concrete
suggestions to both parties with a view to putting an end to the
dispute. Inasmuch as the companies maintained that the decision
required an expenditure of more than twenty-six million pesos,
the Mexican Government offered to appoint a commission that
would supervise, under the guarantee of the Federal Executive,
the execution of the Board's decision, in order to insure to the
Companies that they would not pay more than the aforesaid
twenty-six millions. The Government also suggested that in order
to clarify the meaning of some of the provisions of the award,
the parties agree to a binding interpretation of those provisions
which the companies feared might deprive them of the neces-
sary freedom to manage their business economically and efficiently.
At a meeting held in the President's office the companies'
representatives definitely stated that they could not accept the
Under these circumstances, what alternative was there
left to the Government?--Could it permit non-compliance with
a decision rendered by a legitimate authority and confirmed by
the Highest Tribunal of the Country?--Can anyone imagine that
any foreign corporation in any other country would be permitted
to look with contempt upon, and refuse to obey the decision of,
the highest court of the land?--Could the Mexican Government
permit the companies to carry out their threat that they would
close down their plants and stop the entire production of the fuel
used all over Mexico? The Mexican Government, after carefully
weighing its own responsibility, resolved that the public interests
demanded that the oil production should not be suspended and
that, in view of the fact that the owners were not willing to
continue operations, the Government was fully justified in ex-
propriating the oil industry in order that it might be managed
by the State.
The above proves conclusively that, contrary to what is
stated in the pamphlet, the expropriation was accomplished as
the imperative result of a state of national emergency precipitated
by the companies themselves.
The Government of Mexico announced from the very begin-
ning that it would pay compensation to the companies, and the
latter were asked to cooperate in reaching a proper appraisal of
their properties, but this request the companies hastened to reject.
If no payment of compensation has as yet been commenced, the
blame falls upon the companies which have placed every possible
obstacle in the way of arriving at a fair determination of the
value of their properties.
The Mexican Government, however, still being willing to
reach a friendly solution of the controversy, agreed to listen to
the companies' special representative. Before the latter started
for Mexico, the American press published a statement of a
director of one of the principal companies, containing the bases
upon which the companies would be prepared to enter into an
agreement. The statement in the pamphlet is not correct when
it asserts that these bases were accepted by the Mexican
Government, because, quite to the contrary, such tentative provi-
sions were obviously unacceptable. The granting of the com-
panies' proposals would have created precisely the same situation
which existed prior to the expropriation, and also would have
placed the companies in a privileged position in regard to taxation
as well as in their relations with their workers.
What the companies demanded was that the Government
should fix in advance the taxes to be paid during the life of the
proposed contract and to establish therein, under the pledge of
the Government, rigid rules to govern the labor relations between
the companies and their workers. Obviously, neither of these
conditions could be legally complied with under the Mexican
The Mexican Government cannot guarantee to any corpora-
tion that the latter shall not be liable in the future to pay higher
taxes than those provided in a contract. This would amount to
a curtailment of the powers of Congress.
It is also unconstitutional to impose on the workers inflexible
labor standards, as these must be fixed by means of collective
Furthermore, said bases did not take into consideration
the origin of the dispute, to wit, the inability of the companies
to arrive at an understanding with their workers regarding labor
conditions, and the companies' refusal to accept the conditions
which the Courts had recognized as just and reasonable. By what
right could the Government compel the workers to work for the
companies under stipulations arbitrarily fixed between the Govern-
ment and the companies and in direct opposition to a judicial
The companies' special representative thought that it was
possible to arrive at an arrangement whereby the oil industry
could be operated for mutual benefit. This idea was accepted by
the Mexican Government, but when the companies' representative
was compelled to offer concrete proposals, he never was able to
find his way out of vague formulas and declarations of a general
The President of Mexico was always of the opinion that any
arrangement based upon effective cooperation would require a
previous appraisal of the properties involved; and, if the Govern-
ment agreed to postpone the appraisal, it did so only for the pur-
pose of determining whether there existed any possibility of a
settlement along the lines above mentioned.
Not until the time when the parleys were held in Saltillo in
May, 1939, was the attorney for the companies able to abandon
vague formulas and present instead a definite proposal in the form
of a tentative draft of a "Preliminary Agreement". It is, there-
fore, untrue that this latter document was drafted jointly with
the Mexican Ambassador.
It was considered that in Saltillo definite progress had been
made over the parleys conducted in Mexico City, because for
the first time that the companies' attorney was actually presenting for
discussion a definite draft of a contract. Unfortunately, the bases
which had already been considered as unacceptable, were substan-
tially unchanged in the draft; but the hope was then entertained
that the companies would realize that it was legally and practically
impossible for the Government to accept such conditions, par-
ticularly those relating to labor.
What has just been stated shows the meaning of the declara-
tion of May 3, which reads:
"The discussions have been profitable. An effective progress
towards a mutual and satisfactory agreement has been attained...
It is anticipated that in the near future the discussions will reach
a definite conclusion, and it is not necessary to hold new oral dis-
cussions between President Cárdenas and Mr. Richberg.'
It is inaccurately stated in the pamphlet that in Saltillo the
opinion was jointly expressed by both parties, that an understand-
ing had been reached on most of the issues involved and that
experts, representing both the Government and the companies,
could draw the contracts laying down the future relations which
would permit a settlement of the controversies between the com-
panies and the Government.
By merely comparing the text of the joint statement with
its interpretation by the author of the booklet one can readily
discern the discrepancies between the two. It is one thing to
have a profitable discussion and to make progress toward a cer-
tain understanding, and a very different thing to reach a sub-
stantial agreement on most of the points discussed.
The companies' special representative led his principals into
error if, as inferred from the booklet, he advised them that a
substantial agreement on all vital points of the controversy had
been arrived at in Saltillo.
The assertion which is made at the end of the pamphlet
sponsored by the Standard Oil Company is, therefore, both untrue
and impertinent in expressing that, after the Saltillo parleys, the
President of Mexico changed his mind on the subjects discussed.
It is not necessary to take up the insidious speculations in
which the writer engages or to try to explain the motives of a
change in attitude by the President. The President is still of the
same mind as he was at Saltillo.
The pamphlet concludes by stating that it has been written
to aid the public in an understanding of the causes which keep
the controversy alive. In reality, this is only one more chapter
in the propaganda campaign which is supported mainly by the
Standard Oil in order to create confusion and to disparage the
truly high ideals which actuate Mexico. The companies have not
made, as they allege, any serious attempt to arrive at a satisfactory
solution of the conflict which they themselves brought about,
limiting their action, as a simple reading of the pamphlet demon-
strates, to making proposals which they knew beforehand to be
impossible of acceptance, in order that they might hold themselves
out as victims of the obstinacy of the Mexican Government.
Both in the notes from the American Government to the
Mexican Government signed July 31 and August 22, 1938, and
in the statement made by Undersecretary Welles on August 14,
1939, to which document the pamphlet refers, there is expressed
the doctrine that the expropriation of private property, for public
use, is legitimate, provided that prompt, just and adequate com-
pensation for such property is granted. This doctrine is concurred
in by Mexico. The Government of Mexico, in expropriating the
properties of the oil companies and in rejecting the demand for
restoration made by the latter, has not declared, as it is falsely
stated in the pamphlet, its inability and unwillingness to make
prompt, just and adequate compensation.
Therefore, the actual solution of the controversy in accord-
ance with the principles of law, lies in reaching a determination
as to what is a just and adequate compensation, namely, in fixing
the value of the expropriated properties. Mexico has continuously
sought a solution along these lines, but has failed so far due
entirely to the persistent refusal of the companies.
The laws of Mexico provide that when a friendly agreement
in controversies of this character cannot be reached, the Courts
shall be open for the ascertainment of value, after hearing the
opinion of experts appointed by both sides. In the event either
side fails to appoint such experts, the Courts shall appoint experts
for it. The companies, following their inveterate attitude of
contempt for the laws of the land in which they have operated,
have refused to appoint their own experts, and so, the appraisal
must be made by experts appointed by the Mexican Courts.
Without availing themselves of the remedies provided by
Mexican law and without resort to the Mexican Courts, the
companies are now seeking to becloud the issues for the very
purpose of avoiding a settlement by the means prescribed by the
laws of Mexico and sanctioned by the principles and doctrines of
In April 1940--with World War II some months old--U.S. Secretary of State Cordell Hull
demanded arbitration, which Mexico rejected as intervention in her domestic affairs. But
the wars raging in Europe and Asia quickly reduced the interest of Washington in Mexican
petroleum. Furthermore, Mexico took an antifascist stand that coincided with that of the
United States, which was pleasing. In April 1941 a treaty permitting aircraft of the two
countries to use each other's airfields was indicative of a new atmosphere and new
interests. Global developments made oil rights shrink in perspective. A number of other
developments signified the growing rapprochement. The United States also found new Mexican
President Avila Camacho (1940-1946) easier to deal with than Cárdenas.
Heavy pressure to negotiate the oil dispute found no support in the companies but much
in the U.S. government, with the result that at the end of 1941 Washington signed an
agreement with Mexico, accepting a system whereby experts would decide on the value of
U.S. oil properties in Mexico. That left the companies out of the settlement process and
opened the way to other agreements with Mexico on land claims, silver purchases, credits
to Mexico, and improvement of trade relations. Most of this was achieved by the time of
Pearl Harbor (December 7, 1941 ) or soon thereafter. The petroleum companies thus were
left behind by history.
The Mexican and American experts easily agreed that the company claims were excessive,
and an agreement of April 1942 set a value of $23.9 million, which was paid off by 1949.
No doubt the companies had made large--possibly excessive--profits during their short
tenure in Mexico, but they certainly got a meager terminal agreement. The new nationalism
and government organization in Mexico had proved too much for the huge multinationals.
Problems of the State Monopoly
The nationalization of oil was immensely popular in Mexico, largely because it involved
a swipe at the foreign devils, though a minority approved it also out of anticapitalist
sentiment. Furthermore, it appealed to national pride in general, and together with other
Cárdenas economic measures built confidence in the capacity of the country to develop by
its own efforts. It gave a big lift to nationalism, and the sentiment of nationalism was
the engine most potent for the mobilization of common efforts and the acceptance of change
and sacrifice for the general good.
Expropriation and nationalization of oil did involve sacrifice. Most Mexicans, of
course, did not understand the economics of the matter and supposed vaguely that with the
ousting of foreigners from petroleum all its magic inhered automatically to Mexico. There
was considerable woolly belief that now it did not cost anything to produce petroleum
A few Mexicans knew better. Mexico could not keep up exploration and open new wells and
fields without outside capital and technical aid; for some years those proved hard to come
by. Nor could Mexico easily keep up production from the existing wells and the
distribution of its products. Nor could it easily market surpluses abroad-if it had
any-without the aid of the petroleum giants. Finally, Mexico would find it difficult to
alter the character of the petroleum system to meet changing needs as the country
Mexico found it difficult to build up production, which only reached 43.4 million
barrels in 1941, 78.8 million in 1951, 116.8 million in 1961, 177.3 million in 1971, and
in 1973 reached 191.5 million, about the production of 1921. Building managerial and
technical staff took time, and capital limited. Mexican credit abroad was poor for some
years, so that PEMEX had to live too much off its own domestic sales. There was little
surplus oil for export, and that was partly because of the cry in Mexico that oil was a
"nonrenewable" natural resource, not to be depleted at a "loss" to
sell to foreigners.
The efficiency of PEMEX never was easy to determine. Establishment politicians claimed
marvels for it, critics muttered about incredible mismanagement. The data, unfortunately,
were not good enough to permit certain judgment. It was clear, however, that PEMEX
activity increased, production rose, its personnel grew more numerous, and its budget
soared. It kept Mexico reasonably well supplied with fuel 'I and gasoline, although after
1957 Mexico became a net oil importer of petroleum. Mexico also went into petrochemicals,
with PEMEX in 1958 being granted a monopoly of basic development of the industry. Much
secondary petrochemical production was done under license by private companies, with their
stock owned at a minimum 60 percent by Mexican nationals.
PEMEX grew to meet the demands of electricity production and industrial uses, both of
which rose enormously during World War II and thereafter. Petroleum products were needed
to pave the huge highway system that was built in those same years. And on those highways
rolled more and more buses, trucks, and passenger cars, which, in the 1960s and 1970s,
were chiefly manufactured in Mexico.
These roads and vehicles served by PEMEX helped reduce the ancient isolation of the
Mexican village and the regionalism of the country. It was a boon to the public and a big
help to the governing party and the state apparatus, including the army and police.
Not only was PEMEX a huge enterprise, but it gave the state much leverage with private
enterprise because the latter depended on it for supplies. As PEMEX grew, the remaining
bits of private foreign and domestic activity in the petroleum industry dwindled in
significance. Most of the foreign element was liquidated by the 1950s. Mexico had tamed
(at some cost) the multinational oil companies long before OPEC took a hand.
The PEMEX distribution system grew with the rest. Green-painted PEMEX gasolinerías
sprang up by the thousand, operated by private concessionaries but required to sell
only PEMEX gasoline. Fleets of gasoline and diesel fuel tank trucks rumbled down the new
highways. Tank ships scarcely were needed, since PEMEX exported so little.
One of the most interesting aspects of the growth of this giant was the pricing policy
of the federal government. It required PEMEX to keep the cost of fuel low. This favor to
consumers especially impressed the public because it helped subsidize low bus fares and
cheap gasoline for private cars, and diesel fuel and gas for the mushrooming private
trucking and passenger bus Industries. The directors of PEMEX, on the other hand, grumbled
to their fellows in government that they were not permitted to accumulate enough capital
for expansion and often had to pay heavy interest on borrowings for investment.
The New Oil Bonanza
That pricing policy was going to be abandoned in a time of crisis in the administration
of President Luis Echeverría. During his tenure, Mexican petroleum production began to
fall further behind domestic demand, so imports increased. Unfortunately, that occurred
just when Arab and other Third World producers erected the great OPEC cartel and
quadrupled the price of their oil. Mexico paid $124 million for oil imports in 1972, but
$382 million in 1974, under the OPEC dispensation. It was clear that along this road lay
This was especially the case because from 1974 to 1976 production in the total Mexican
economy declined to the point where it was not keeping up with population growth. That
occurred in a country accustomed to annual per capita increases in national production.
Echeverría also chose to permit high imports of all sorts of supplies for the
industrial plant he was so intent on fostering at a faster pace than the country could
afford. He financed this extravaganza with increased foreign borrowing. The external debt
rose from $2.2 billion at the end of 1967 to $9.5 billion in 1974 and $20 billion in 1976,
by which time debt service required $4 billion a year. Private investors lost confidence,
and the government raised public credits. That added to an irresistible pressure on prices
and destroyed Mexico's twenty-year immunity from that common malady of developing
countries-inflation. Finally, in August 1976 Echeverría devalued the peso. It had to be
done, but the deed was met by a fury of fear and criticism. Echeverría left office in
December with his reputation in shreds.
But he had made one decision not long before that promised a way out of the dilemma of
need for more investment capital while the economy was deteriorating. He abandoned the
policy of freezing prices at an artificially low level. The result was greatly increased
PEMEX revenues, and they were used to increase production and search for new reserves.
The results of this were not evident to the public until after the inauguration of
President José López Portillo in December 1976. Proved reserves of hydrocarbons (oil and
natural gas) went from 5.56 billion barrels at the end of 1970, to 11.16 billion at the
end of 1976, 16.8 billion by the end of 1977, and more than 40 billion at the end of 1978.
There were rumors-possibly founded in part in hopes or political tactics- -that reserves
ultimately would exceed 200 billion barrels, topping the fantastic reserves of Saudi
Furthermore, by the beginning of 1979 actual production of crude was up to an annual
rate of about 51 1 million barrels, far beyond the once-fabulous year 1921. Much of the
new production was going to the United States, with beneficial effects on that country's
strategic position and with happy results for Mexico's threatened financial position.
So many problems between Mexico and the United States that loomed large from the 1950s
to the early 1970s took on a new hue as well as new dimensions--or at least both countries
hoped so. Even floods of illegal immigration to the United States could be nearly dammed,
diverted, accepted, or compensated for to please the oil colossus south of the border.(1)
1. See chapter 8 for more on recent
developments in Mexico oil and natural gas.
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