Mexican Shale Industry Hoist on Nafta-Induced Gang Violence Petard

They were careless people, Tom and Daisy – they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together and let other people clean up the mess they had made. 
– F. Scott Fitzgerald, The Great Gatsby

There’s perilous little recognition in the US of how much of the rise in gang violence and drug wars, as well as much harsher economic conditions for ordinary people, is the direct result of Nafta. While the toll has fallen hardest on Mexicans, American businesses may see collateral damage in the form of not getting much access to Mexico’s shale gas.

In case you think it’s an exaggeration to blame Mexico’s spectacular increase in gang violence on Nafta, Jeff Faux explained the connection in a 2014 Huffington Post article, NAFTA and the Narcos. Key sections:

Mexico has long been a supplier of marijuana to the U.S. market. But in the days before NAFTA, the Mexican government had an informal deal with the illegal drug monopoly: “Sell what you want to the Americans. But keep our country clean of drugs and violence.” The system was cynical, but it worked, producing export earnings for the Mexican economy and maintaining public safety.

With NAFTA, the volume of trade across the border swelled, and pressure from business to move goods quickly made it impossible for U.S. Customs officials to make thorough inspections for contraband. As a result, it became much easier and cheaper to move cocaine from Columbia, that had previously been delivered by sea, overland through Mexico.

Given their strategic location, the Mexican drug lords gradually took control of the major South American routes into the U.S. market…This kind of money drew new competitors into the business, a process encouraged by Mexican political leaders whose connections to the narco-traffickers were ignored by the administrations of George Bush I and Bill Clinton in their eagerness to deliver NAFTA to their corporate backers.

As the competition intensified, rival cartels hired ex-policemen and ex-soldiers — many trained to kill by the U.S. military — to do their dirty work…Violence spread and became more brutal, involving torture, mass execution and the public display of horribly mutilated bodies.

Meanwhile, the sanctions against selling illegal drugs within Mexico crumbled. The rapidly growing volume of cocaine traffic from South America through Mexico made it harder to launder drug money as it changed hands across borders. Columbian suppliers began paying their Mexican trans-shippers in kind — i.e. in cocaine. The Mexicans in turn used the cocaine to pay their own employees, who, in order to get cash, sold it on the street. And like any expanding industry, the Mexican cartels gradually diversified their product line — in this case, to include heroin and methamphetamines, which are also used to make payroll.

In the mid-2000s the hired assassins began to organize their own gangs. Where the older cartels were primarily interested in the business of selling drugs, these new criminal organizations spread out into robbery, kidnapping, extortion, and intimidation by murder. Victims were no longer rival gang members or bystanders injured by accident. They were farmers, businesspeople, and their customers and employees.

The article below from OilPrice describes how this gang violence is impeding shale gas development in Mexico, since gangs control much of the region where the reserves lie. One might argue that the Mexicans got lucky, that this obstacle to developing shale gas is a thin silver lining in the cloud of having the country so much in thrall to druglords. The situation is so vicious and chaotic that one does not get the sense that energy interests would entertain trying to find a way to do business with the drug thugs. There’s too much physical and economic risk. After all, possession is 90% of the law.

Mexico has roughly 545 trillion cubic feet of recoverable shale gas and 13 billion barrels of shale oil.

The obstacles to kick-starting Mexico’s shale industry have dampened the once lively enthusiasm surrounding Mexico’s historic energy reform. Recent legislation ended the development monopoly of Petroleos Mexicanos (Pemex), which would in theory allow private parties to enter.

One holdup has been the difficulty of reaching consensus on the legal framework for development and passing the related legislation.

Political disputes over what could be
President Enirque Pena Nieto wants to increase production to 3 million barrels of oil per day by 2018, up 25% from the current 2.4 million barrels per day level,
but experts are skeptical.

The OilPrice article focuses on the practical impediments:

In order to access the potentially abundant oil and gas from Mexican shale, the government will need to rely upon the private sector. Under the energy reform, Pemex is given first refusal over any projects – meaning that it can keep the assets it really wants, but allows the rest to go to bidding for private companies. Pemex will likely stick with its wells that are already producing, and leave drilling new shale wells to incoming private companies.

However, many areas in the Burgos Basin – which lies just south of the rich Eagle Ford formation in Texas – are suffering from intense gang violence. Bloomberg News reported on the conditions in Tamaulipas, a state in eastern Mexico, which at times resembles a “war zone.” A power vacuum left over by the arrest of the leaders of the Zetas and Gulf Cartels last year has the eastern coast dealing with heightened violence – shootings along highways and burned down buildings are commonplace as rival drug gangs jockey for territory.

Further north, shootings and kidnappings plague Highway 2, which runs parallel to the border with the United States.

The violence poses an immediate threat to the oil companies working there. The Mexican Army is now escorting workers of Weatherford International, an oilfield services firm, to and from their drill sites after a drug gang shot up a hotel where the workers were staying.

Aside from gang violence, theft of oil and gas by drug cartels poses another threat to companies. In 2013, Mexican gangs stole around $790 million worth of fuel, which is siphoned off from pipelines and smuggled.

Perhaps more importantly, the violence will undermine Mexico’s attempts to boost oil production over the longer term. The Mexican government doesn’t believe that Pemex will be able to increase production. The state-owned company’s goal is to merely keep production steady as wells age and decline. Instead, the government will be relying upon the private sector. Over the next four years, the government expects 500,000 barrels per day to come from non-Pemex sources.

But that goal will prove elusive if independent oil and gas companies are scared off by gang violence.

“It does raise the cost of doing business when you have to face the threats of kidnapping and extortion,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, told Bloomberg.

If Mexico is to achieve its goal of reviving oil production, which has declined by more than one-third over the last decade, it will not only need to get the legal framework right, but the government will also need to ensure drug violence drops to a level that doesn’t scare off private oil and gas companies.

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17 comments

  1. John

    Unfortunately, Rome (Washington) is not concerned with all that mayhem in the Mexican outpost. Stamping out the illegal drug trade in its entirety is not a motive either. What matters most to the emperor is shoveling treasure to the praetorian guard and their Wall Street cronies that benefit from NAFTA.

  2. Sundog

    I feel like I could write a book that would refute the “blame NAFTA” angle. Rather than doing so, I just ask readers to question whether China’s WTO ascension and the end of PRI single-party rule might be vastly more important than NAFTA in terms of reducing stability and encouraging bizness into markets such as kidnapping and extortion which are deleteriously parasitic, as opposed to the drug trade which ain’t necessarily so.

    Readers interested in this sort of problem would do well to apply the issues raised in this post to Afghanistan (and would benefit by attending to the Special Inspector General for Afghanistan Reconstruction aka @SIGARHQ on the Twitter machine).

    BTW this recent piece by Nils Gilman is relevant and important.
    http://www.the-american-interest.com/articles/2014/06/15/the-twin-insurgency

    1. Yves Smith Post author

      Your implied timeline does not match up. China entered the WTO in 2002. The article by Faux states that the second phase, of the assassins forming their own gangs and challenging the druglords, began in the mid-2000s. There is no way that the infrastructure and the steps that took place prior to that shift took place in a mere 3-4 years.

      1. Peps Girl

        To back up your point, Yves, Los Zetas were formed in 1999 and moved to the top of the hierarchy of the gulf cartel, or beside it, in 2003.

      2. Pepsi Girl

        I think my original comment got eaten, but I just wanted to say, Yves is correct. Los Zetas were formed in 1999 and became more of a parallel organization than a simple organ of the gulf cartel in 2003.

      3. JM Hatch

        Disfunctional governments have never slowed down the oil & gas industry in Nigeria, Libya, or most of South & Central America. The oil companies prefer it that way, it’s much easier to avoid royalties, cheat on lease payments, and squeeze the price if the government appears to be dysfunctional. The slowness in shale gas in Mexico has much more to do with the markets.

        http://www.the-american-interest.com/articles/2014/06/15/the-twin-insurgency/

        It would seem that both sides, the criminal element in both government (ala Clinton / Rubin/Summers) and the drug lords, had every interest in a semi-functional, highly corrupt Mexican government. It’s a model that they’d like to foist on the whole world.

  3. RUKidding

    The mayhem & violence in Mexico & Central America, wrought at least partially from NAFTA, is also why so many kids and young adults are somehow being shipped by their elders to the USA. In many ways, I don’t blame them for this: this mess in their countries was brought about by powerful forces who clearly could give a stuff about the 99% and our trevails. If some of us eaters die? Yay: less mouths to feed.

    I have a feeling, based on no evidence whatsoever, that a lot of parents & guardians in Mexico & Central America figure: send the kids to the USA, who made this mess. Let the USA figure out a way to take care of them. I’m not sure how well this will work out for these kids. I’ve heard stories about the sad state of affairs in the prisons where they’re held. They don’t really even get three square meals per day, but I suppose, at least, they’re safe from the Narco assassins… for now.

    1. francis

      I don’t think anybody blames the parents or the kids, it’s a terrible situation for both. Pretty clear we can blame Obama, biden, Pelosi, and the rest of the dems making noises about the ‘dream act’. Pretty good motivation to get your kids into the country.

  4. ambrit

    Friends;
    The other aspect of this Mexican Mess is the extent to which the Narcos will export their murderous methodologies to El Norte. We are already seeing Narco organized cannabis cultivation on an industrial scale inside the National Parks of los EEUU, (Estados Unidos.) Anecdotal information suggests that parts of some U.S. parks are no longer safe for hikers and campers. Smokey the Bear now needs to carry an assault rifle. I’m waiting for some Narcos to get a wild hair and go off and attack an entire U.S. town like Pancho Villa did Columbus Texas in 1916. Then we’ll find out if our much vaunted police state is up to the task.

    1. RUKidding

      Similar happening in NW CA, home to famous Humboldt County. Long time local pot farmers (illegal but friendly) are now facing competition in various ways by the Mex Narco Mobs. Plus Narcos are planting pot farms on various state and federal lands (not just the Nat’l Parks), where, as indicated, innocent hikers or hunters, can face the end of an assault rifle. Also these Narco pot farms are using a lot of water in drought-ridden CA, which presents another problem. The local old-time hippie pot farmers are more conservative in their water use, but not the Narcos, who don’t give a stuff.
      Yeah, that NAFTA: really brought good things to the USA.

    2. Banger

      Narcos are here in the piedmont part of NC–their more pure kind of heroin has been killing people ’round here.

  5. Lune

    I think the link between NAFTA causing cocaine distribution to shift to Mexico is tenuous. There was a great post several years ago in the NY Times called “re-engineering the drug trade” that partially talked about it. They argued that the DEA was so successful in shutting down Miami and the eastern seaboard as a cocaine transit point, that this drove Columbian cartels to seek out partnerships with Mexican drug lords who had pre-existing overland routes for their long-time marijuana exports. To me, this makes more sense: Miami was built by the cocaine trade (what else could be responsible for it going from a sleepy tourist / retirement town to major American city in a few decades?) but by the 80s and early 90s the drug war was getting so intense (and local police forces so corrupt) that the Feds finally clamped down. It wasn’t unusual to see reports of decapitated bodies on the sides of roads in the 80s as fallout from the drug war. If you’ve never seen the documentary “Cocaine cowboys”, I highly recommend it. It’s fascinating and absolutely floored me about how much money came through the cocaine trade and built Miami into the drug-based banking / finance / money laundering capital that it is today.

    Once water routes into Miami were controlled, the cartels looked for other routes and partnered with mexican cartels to use land routes through the west/southwest. The rest of the process (slowly replacing relatively violence free marijuana dealers with mechanized cocaine cartels) described I would agree with.

    I’m also not sure that increased trade has led to decreased inspection for contraband. By measuring the price of various drugs before and after transit through various checkpoints, one can get a general idea of the effectiveness of the inspections process through that checkpoint. Using that method, transit through San Ysidro, the main checkpoint between tijuana and san diego and the primary transit point for Mexican drugs into California, still commands the highest price increase of any checkpoint (in the world, I believe). Indeed, inspections at San Ysidro are effective enough that cartels have been forced to develop expensive alternatives like digging tunnels under the border and even using submarines to land drugs on unguarded central California coastlines.

    P.S. One of my pet peeves about the national press (I know, I need a larger numbering system :-) is the fact that they dedicate so much airtime to chaos in the middle east while ignoring the fact that there is a major war going on, complete with tanks on the streets, decapitated bodies in the parks, and daily guerrilla warfare battles literally 15 minutes from the border of a major American city (San Diego) that very few people (even in California) care about.

  6. FederalismForever

    What an incredible advantage Mexico has! It is located geographically immediately south of the world’s greatest consumer market – America. It is not at war with America, and maintains relatively peaceful relations with America. Moreover, America currently has very few protectionist barriers to economic trade between Mexico and America. It is worth considering how fortunate Mexico is in this regard, and to reflect on how many other countries would kill to be in Mexico’s position. And, yet, how does Mexico choose to exploit this tremendous advantage? In the worst way possible – by selling and/or transporting truly epic amounts of hard drugs to America! (Compare what either Japan or South Korea could accomplish with the same set of facts were either country located immediately below America.) Truly, the onslaught of hard drugs into America from countries and regions below it is comparable to the opium wars launched by Britain upon defenseless China.

  7. Crazy Horse

    I recall reading an article decades ago entitled “The Political Economy of Smack” in which the author dug beneath the surface moralizing to analyze the question that really matters: Who Benefits? Flash forward to 2014: Who are the economic drivers behind our hugely profitable recreational drug trade?

    The Prison-Industrial complex–Vendors of prison security systems–Prison construction–Guards ect.
    The Public Safety” bureaucracy— police, judges, equipment manufacturers.
    The entire banking-money laundering system.
    Gangs and warlords who control of transport and sales.
    Arms manufacturers for foreign and domestic wars.
    Insurance companies through increased rates and sales volume.
    Real estate developers and salesmen.
    Hedge funds and “legitimate” investment vehicles.
    Luxury goods sales — from Rolexes to Lamborghinis.
    Politicians —campaign funds and bribes.
    The CIA, NSA and black ops agencies— off the books funding.
    The mass of unemployed who can earn a living on the street —-or at least three meals and a roof over their head in prison.

    Pretty easy to see why there is no real effort to get to the root of the problem.

    If its contribution to”creative destruction” were fully accounted for the illegal drug trade might just turn out to be one of the top five engines driving the modern US economy. After all, the basic mechanism of consumer capitalism requires maximization of waste and replacement of trashed items by cheaper goods with shorter service life purchased with new debt. it any wonder that our leaders prefer a state of permanent War on Drugs that cannot be won?

    And the war could be won with only simple policy changes.
    1- Make all drugs—- recreational or otherwise— completely legal and regulated only for purity.
    2- Subsidize the cost of all recreational drugs and distribute them free through public agencies for a decade or so. Use market pricing to kill the trade in formerly illegal drugs.
    3- Adequately fund rehabilitation programs for those who choose to free themselves from addiction.

    Who have we just put out of business?

    —Every brutal Cartel terrorizing people in Mexico and the US.
    —The prison industrial complex that imprisons the highest percentage of people in any industrialized nation.
    —Perhaps 40% of the police force, courts & judges.
    —A significant source of revenue for many banks.
    —The DEA and other spook agencies that use the War on Drugs as cover for foreign intervention.

    Free drugs? Wouldn’t everyone instantly become a hopeless junky or crack head? I predict that there would be a surge in deaths among those who are looking for a way to escape life, but within a decade or so the level of addiction would be no higher than it is now. And a society free of the illegal drug trade and mass imprisonment would be an infinitely better one than we now have.

    1. Nathanael

      Thankfully, your proposed legalization policies are EXTREMELY POPULAR. They may be implemented even though there is big money in prohibtion.

  8. Globus Pallidus XI

    Indeed, well said.

    But with respect, it’s not just the drug war.

    Canada also shares a border with the United States, and is also a party to NAFTA – why isn’t Canada so afflicted?

    To a great extent, because the Canadians don’t have more children than they can afford, so Canadians are prosperous, so they have better things to do than join drug gangs.

    And of course, there is the Mexican oligarchy pushing to not create or enforce anti-trust laws, and the Mexican governments’ bailing out of rich investors by taxing food and medicine for working class Mexicans.

    So yes about the drug war – but there is more to it than that.

    http://globuspallidusxi.blogspot.com/2014/02/mexicos-drug-war-hecho-in-el-wall.html

  9. Nathanael

    So here’s the really big issue with the drug war.

    The drug gangs are more powerful than the military, smarter than the military and are quite good at infiltrating the military.

    As a result, in any open warfare, they will win.

    This is another example of US policy generating enemies who are capable of wiping the floor with the US.

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