The Phoenix Project: A Lost Opportunity

By Arturo Damm Arnal *

Between January and May, petrochemical imports to Mexico grew 146 percent, measured in tons, and 281 percent, measured in dollars, from the same period of the previous year. While imports overall are not a problem, and benefit those companies that enter the market, the particular case of Mexican imports of petrochemicals is, at best, shameful. Mexico is a net importer of petrochemicals. Not because the country lacks the commodity to produce them, petroleum, but because the amount of taxes that the government levies on PEMEX does not leave any capital to invest in refining, and because the law prohibits any private capital whatsoever, be it national or foreign, from being invested in any activity related to petroleum – a policy that is a clear violation of the freedom to engage in commerce as well as of the private ownership of the means of production.

Given that fact, it is worrying that the Mexican government has decided to cancel, at least for the moment, The Phoenix Project, which was intended to increase petrochemical production, mainly of ethylene and its derivatives, by allowing PEMEX to form alliances with the private sector. Why was the project canceled? Because the government did not allow one of the principal requests of the private sector: a price for natural gas (an ingredient in the production process of ethylene) lower than the price quoted on the spot market. In other words, the government refused to grant a subsidy, a decision that aborted the project altogether. The Phoenix Project would have been the second largest investment in the six years since Vicente Fox was elected President ($2 billion dollars), second only to the canceled construction of a new airport in Mexico City.

The first thing that one must say is that the refusal to grant the subsidy was correct. What justifies the government using part of the taxes paid by taxpayers to offer a privileged investment that, one supposes, will produce profits? Of course, nothing. But that being said, one must consider that PEMEX could end up being the only supplier of the necessary commodity for the production of ethylene. And most often the decisions of PEMEX are not made according to the exigencies of the market, but based on what are the immediate resource needs of the government, or moreover, the political convenience of bureaucrats. This results in considerable risk, as is the risk of contracting with any monopoly, especially if it is the sole supplier of the commodity.

What is the fundamental problem? Prohibiting the participation of private capital in the petroleum industry and its derivatives, national or foreign, results in a market closed to the participation of those who are willing and able to participate. This eliminates needed competition among bidders. This has caused a paradoxical situation: we have the commodity, but not the resources to process it, which results in Mexico, a petroleum-rich country, becoming a net importer of petroleum-based products. In the case of gasoline, Mexico imports 225 thousand barrels a day, a full third of the national consumption, in some cases from non-petroleum countries like Argentina.

One must ask how it is possible that a petroleum country, with a growing demand for hydrocarbons and its derivatives, has not built a refinery since 1979? Such is the case with Mexico. Moreover, it should be asked of the current candidates for the presidency, who is willing to propose, as part of his or her political platform, the opening of the petroleum industry and its derivatives to the participation of private capital, national or foreign? Are any of the candidates willing to do what’s necessary, first, to guarantee the offering of petroleum-based products, and second, assure the freedom of entrepreneurs to compete in the marketplace and allow the private ownership of the means of production?

* Arturo Damm Arnal is a Mexican Economist and Philosopher devoted to journalism and college teaching.

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