Mexico Nationalizes Foreign Oil Properties
In the late 1930s, Mexico undertook a significant action by nationalizing foreign oil properties, fundamentally altering its oil industry landscape. At that time, foreign companies, primarily from the United States and Europe, controlled the majority of Mexico's oil resources, leading to widespread dissatisfaction among Mexican workers and economic disparities. On March 18, 1938, President Lázaro Cárdenas announced the government's exclusive control over oil production and distribution, seizing assets from seventeen foreign oil companies, including major players like Royal Dutch/Shell and Standard Oil. This decision sparked immediate backlash from the affected foreign entities and their governments, resulting in diplomatic tensions and economic sanctions.
Despite the initial turmoil, the nationalization was met with widespread support among the Mexican populace, leading to the establishment of Petróleos Mexicanos (PEMEX) as the state-run oil company. Over the years, PEMEX not only stabilized the industry but also became a crucial source of revenue for the Mexican government. While nationalization brought economic gains, it also led to a cautious foreign investment climate in Mexico, as many companies feared further government intervention. The event is viewed as a pivotal moment in Mexico's history, influencing future nationalizations in other sectors and shaping Mexico's economic policies for decades to come.
Mexico Nationalizes Foreign Oil Properties
Date March 18, 1938
In order to keep hefty oil profits from going to foreign investors, the Mexican government seized control of all aspects of the Mexican petroleum industry. American and European oil companies complained about lost profits and wasted investments and pressured their governments to intervene, but Mexico refused to bow to diplomatic pressure and ultimately nationalized other industries in an effort to bolster the Mexican economy.
Locale Mexico
Key Figures
Lázaro Cárdenas (1895-1970), president of Mexico, 1934-1940Franklin D. Roosevelt (1882-1945), president of the United States, 1933-1945Cordell Hull (1871-1955), U.S. secretary of state, 1933-1944Josephus Daniels (1862-1948), U.S. secretary of the Navy, 1913-1921, and ambassador to Mexico, 1933-1941
Summary of Event
In the 1920’s, Mexico was the second-largest producer of petroleum in the world and the world’s leading oil exporter. American and European business interests, however, controlled most aspects of the Mexican oil industry, and as a result Mexico’s immense oil profits benefited foreign investors instead of the Mexican economy. Foreign companies made matters worse for Mexican unions by refusing to improve working conditions for Mexican oil workers. Tensions between workers and foreign managers gradually increased, and in May of 1937, an industrywide strike crippled the petroleum industry.
The Mexican government convinced union members to resume working while it attempted to negotiate a settlement, but oil companies claimed that financial difficulties prohibited them from fulfilling many of the workers’ demands. As a result of this claim, President Lázaro Cárdenas ordered a full investigation of the oil industry. Although the study found that oil production had declined considerably due to the Great Depression of the 1930’s, it also demonstrated that the Mexican oil industry produced more profits than the American oil industry.
More strikes and legal battles plagued Mexico’s oil industry after this revelation. On March 18, 1938, in an effort to restore stability, Cárdenas announced that the Mexican government would assume sole control of production, refining, and distribution of petroleum and natural gas within Mexico, and the Mexican government quickly took control of all foreign oil properties within the country. The declaration affected seventeen foreign oil companies operating in Mexico, the largest of which were Mexican Eagle, operated by Royal Dutch/Shell, and Huasteca, operated by Standard Oil of New Jersey. The foreign companies estimated the value of lost property at more than $350 million.
The announcement of the creation of a state-owned monopoly was instantly popular in Mexico. Mexicans held spontaneous parades and took up collections to pay the foreign oil companies, which reacted with instant hostility. American-owned oil companies pleaded with the U.S. government to intervene, and Secretary of State Cordell Hull publicly condemned the action. The United States enacted a brief economic embargo against Mexico as a result, and the U.S. Treasury discontinued purchases of Mexican silver. Even so, the United States soon grudgingly followed Franklin D. Roosevelt’s Good Neighbor Policy and urged American corporations to pursue all available legal avenues within Mexico before taking more extreme action. European nations reacted with similar bitterness: Great Britain demanded restoration of its oil properties and suspended diplomatic relations with Mexico when its demands were not met, and the Dutch government insisted on immediate and significant compensation. The dispossessed oil companies also started a massive public campaign to boycott Mexican petroleum products.
The American and European oil companies hoped their actions would force Cárdenas to rescind his decree and return their property. Indeed, demands by the European and American governments did create hardships. The discontinuance of American silver purchases proved to be particularly burdensome. The United States purchased approximately thirty million dollars in silver each year from Mexico, and Mexico did not sell mass quantities of silver to any other nations. As a result of the halt in American silver purchases, Mexican silver soon appeared on the world market, and the price of silver fell rapidly. Furthermore, the silver profits that Mexico lost caused the value of the peso to plummet.
In order to manage the new national monopoly, Cárdenas soon created a state-run oil company called Petróleos Mexicanos (PEMEX), which received the exclusive right to extract, refine, and market oil within Mexico. Foreign oil companies had been rather successful in Mexico, but PEMEX had initial difficulties, particularly because foreign oil companies refused to sell PEMEX the chemicals it needed for refining. The foreign powers still hoped to force Mexico to relent and invite foreign companies into the country again. PEMEX persevered, however, and sought alternative methods of production. The company’s experimentation led to a deadly explosion that killed a number of engineers, but ultimately PEMEX managed to produce the necessary chemicals. PEMEX faced difficulties also in obtaining equipment, and boycotts made foreign markets virtually impenetrable. As a result, Mexico began to sell increasingly large amounts of oil to the fascist regimes in Spain and Germany. In exchange, these nations provided PEMEX with machinery and technical assistance.
With the outbreak of World War II, Mexico found itself in an uncomfortable situation. It supplied oil products to Germany and the Axis Powers, but at the same time it tried to maintain a good relationship with the United States and the Allies. As a result of Mexico’s position, the United States and Britain blocked Mexican oil shipments to their allies, and some American and British oil companies even advocated an invasion of Mexico. Finally, in 1943, American and British leaders realized that eliminating Nazi Germany’s oil supply was more important than punishing Mexico. Further, as Ambassador Josephus Daniels had informed President Roosevelt, Cárdenas’s position seemed secure, and Mexico was not likely to yield to foreign pressure. As a result, the American government persuaded dispossessed oil companies to settle, and the Mexican government paid the foreign oil companies twenty-four million dollars for seized properties, a small fraction of the value lost by the foreign companies. Nevertheless, concessions led to a relaxation of restrictions against Mexico, and Mexican oil profits grew as World War II generated a high demand for oil.
Significance
Generally, Mexicans saw the expropriation of their oil as an economic success. Indeed, the move was so popular that March 18 became an unofficial holiday in Mexico, and Lázaro Cárdenas ranked among Mexico’s most popular presidents. Despite lost government revenues from silver sales, which caused the devaluation of the peso in the world economy, PEMEX ultimately generated tremendous profits for the Mexican government. On average, oil profits increased by 6 percent per year until the 1970’s, when discoveries of new petroleum reserves further increased Mexican oil production.
Although nationalization provided the Mexican economy with increased oil revenue, the change damaged Mexico’s economic relationships with the nations that lost property as a result of the expropriation. Fearful that the Mexican government could seize control of other industries, many businesses chose to keep their investments outside Mexico for several decades, and the lost revenue from the potential investments had an incalculable effect on the Mexican economy. Indeed, these businesses were correct in their suspicions: The oil expropriation laid the groundwork for the Mexican government to nationalize other industries that it judged essential public institutions. By then, however, a precedent of expropriation had been set, and other Mexican industries did not face the same level of international backlash when they were nationalized. The successful operation of PEMEX also encouraged the Mexican government to believe that government-owned monopolies could benefit the national economy. As a result, Mexico nationalized its airline (Aeromexico) in 1950 and its telecommunications industry (TELMEX) in 1972.
Bibliography
Dallek, Robert. Franklin D. Roosevelt and American Foreign Policy, 1932-1945. Rev. ed. New York: Oxford University Press, 1995. Places the Mexican oil expropriation into the context of American foreign policy during the Roosevelt administration. Includes a new afterword.
Jayne, Catherine E. Oil, War, and Anglo-American Relations: American and British Reactions to Mexico’s Expropriation of Foreign Oil Properties, 1937-1941. Westport, Conn.: Greenwood Press, 2001. Examination of British and American reactions to the Mexican oil expropriation that demonstrates the inability of the United States and Britain to work together in their relationships with Mexico.
Schuler, Frederich. Mexico Between Hitler and Roosevelt: Mexican Foreign Relations in the Age of Lázaro Cárdenas, 1934-1940. Albuquerque: University of New Mexico Press, 1998. Examination of Mexico’s foreign policy. Argues that the United States and Mexico had a good relationship during the covered period and that the oil expropriation stabilized the Mexican economy.