Historical Text Archive: Electronic History Resources, online since 1990

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 road paving.

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 inhabitants.

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 predecessor, Madero.

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.

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 war-wrecked Mexico.

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, "Frog."

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 oil companies.

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!

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 Court.

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 dangerous future.

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 American leaders.

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):

               OIL



               MEXICO'S POSITION









A STATEMENT BY

THE BUREAU OF INFORMATION

OF THE MEXICAN GOVERNMENT

FEBRUARY, 1940





Distributed by the

CONSULATE GENERAL OF

MEXICO IN NEW YORK

70 PINE STREET

NEW YORK, N. Y.









Printed in U.S.A.



                                                          1

                                                            



     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 

false:



     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 



                                                          2



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 

follows:



     "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



                                                          3



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 



                                                          4



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-

ligations.



     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



                                                          5



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  

facts:



     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 

 

                                                          6





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

workers.



        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

decision.



        VI.  It is not true that the award rendered by the Board of

Conciliation and Arbitration conceded to the workers their full

               

                                                          7



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

correct.



        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,

                                                          

                                                          8





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

President's suggestion.



     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.

     

                                                          9

     

     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

Constitution.



     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.



                                                          10



It is also unconstitutional to impose on the workers inflexible

labor standards, as these must be fixed by means of collective

bargaining processes.



     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

decision ?



     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

nature.



     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





                                                          11



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 C&aacuterdenas 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



                                                          12





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



                                                          13



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 

International Law.

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.

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 products.

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 industrialized.

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.

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 disaster.

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 Arabia.

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⁾

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