HomeNewsAnalysisHow Mexico Organized Crime Threatens Growth of Oil Industry
ANALYSIS

How Mexico Organized Crime Threatens Growth of Oil Industry

MEXICO / 4 JUN 2014 BY PATRICK CORCORAN EN

As Mexico works to implement its landmark oil reform, organized crime groups are mounting a nettlesome challenge, raising questions about their ability to undermine the nation's economic development.

A recent report from Rice University's Baker Institute, titled Energy Reform and Security in Northeastern Mexico, details the pitfalls to the oil industry's modernization in Mexico. According to authors Tony Payan and Guadalupe Correa-Cabrera:

"The [government's] failure to recover vast swaths of territory lost to Los Zetas and bring it into full government control under the rule of law puts the reform initiative's promises at risk. The [government] must strengthen all of its justice institutions and reestablish law enforcement credibility to provide not only legal certainty but also assurances to private and foreign investors that their capital is protected. The government must also be transparent about the dimensions of criminal activity in the region and work with investors to address the problem. The main areas of focus should be police reform and the fight against corruption.

Should Mexico fail to address the threats posed by organized crime and adhere to these recommendations, Payan and Correa-Cabrera argue that it could fall into the same trap as Nigeria and Libya, where profits from a lucrative natural resource are squeezed by criminal groups.

As noted by the authors, the Zetas represent the largest challenge. The group's area of influence covers most of Mexico's onshore oil producing regions, especially the shale oil fields that represent the future of the industry. Oil theft has grown endemic in recent years, with the robberies causing estimated annual losses of some $1 billion to Mexico's national oil company, Pemex. The company has filed two lawsuits in the US against local brokers for knowingly moving stolen fuel. No criminal group has been more closely linked to the phenomenon than the Zetas.

SEE ALSO: Zetas News and Profile

The overlap between organized crime and Mexico's energy industry represents a broad challenge to President Enrique Peña Nieto's economic agenda, especially in the wake of the landmark oil reform passed last year, which aims to open the country's oil industry. The threat prompted a recent visit by Mexico Foreign Minister Jose Antonio Meade to Houston, Texas, where he spoke at a Baker Center event and reassured local oil executives that Mexico was a safe place to invest:

"We recognize there is a challenge, and the challenge is not just in Mexico but regional in nature. But Mexico has been doing what it needs to do in order to recover these conditions, we will be successful in doing that, and that has not resulted in less investment."

InSight Crime Analysis

The Zetas' threat to Mexico's oil industry occurs in the context of a larger diversification of the portfolios of Mexican criminal groups during recent years. Whereas they previously focused mainly on trafficking cocaine, marijuana, heroin and other drugs, these organizations now engage in a wide variety of other activities, among them extortion, kidnapping, natural resource theft, carjacking and bank robbery.

One prominent example of how this poses a growing threat to the wider public is the murder of Virgilio Camacho, an executive with global steelmaker ArcelorMittal. Camacho's firm had come into conflict with the Knights Templar because the criminal group's illegal mining operations poached from areas where ArcelorMittal held exclusive rights and cut into its profitability.

Activities such as oil theft and extortion typically target legitimate businesses and private citizens, while in the past criminal groups fought only with one another. Collectively, these crimes -- especially when coupled with acts of vengeance against people like Camacho -- act as a significant disincentive on economic activity.

SEE ALSO: Coverage of Oil Theft

The degree to which a security challenge like Mexico's can affect growth is a matter of debate. The threat of violence requires businesses in the regions most prone to criminal activity to spend more on security than they otherwise would, which reduces the amount available for productive investments. In theory, insecurity can scare off foreign direct investment (FDI), but Mexico's FDI doubled last year despite the ongoing security issues.

One recent study from Italy's central bank, the Banco D'Italia, offers some sense of the scope of the concerns: the author tracked the economic performance of two regions, Apulia and Basilicata, both before and after criminal groups began operating there. Italian groups have long employed the sorts of aggressive tactics targeting the civilian population and the legitimate economy that have only more recently emerged in Mexico. (Some analysts have referred to the recent shifts in Mexico as the "Sicilianization" of the Mexican groups.) After a thirty-year period in which organized groups were operating, the study found the two regions' gross domestic product (GDP) was 16 percent lower than it would have otherwise been.

The Italian groups' practices are more ingrained than those in Mexico, and there is no reason that such a long-term brake on economic activity is inevitable. But it does offer a demonstration of the risks if the challenge is not dealt with. No realm represents a more important symptom of the current problems than the oil industry.

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