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Newsweek: Victor looks at problems with Mexico's national oil company, effect on oil markets

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David G. Victor
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David G. Victor is a professor at Stanford Law School and directs the Freeman Spogli Institute's Program on Energy & Sustainable Development; he is also adjunct senior fellow at the Council on Foreign Relations.

What to do about Mexico's oil company, Pemex, may seem like a parochial issue of interest only to Mexicans and a few oil industry executives. But the matter should be of concern to anybody who is wondering when oil will come down off its near-record highs.

Pemex generates two fifth's of the Mexican government's income and is a lucrative employer, but it is ailing from neglect. For years the government has milked Pemex of cash without giving it the wherewithal to invest in and develop new sources of oil. When President Felipe Calderon proposed last week to reform Pemex and encourage more private investment in oil exploration and refining, his leftist opponents shut down the country's legislature in protest. Pemex, they claimed, is a cherished national treasure that must not be pushed into private hands.

Mexico is hardly the only country that treats its state oil companies as ATMs for governments, unions, cronies and others who siphon the rich benefits for themselves. A large fraction of the world's oil patch is struggling with the problem that bedevils Calderon: how to make state-owned oil companies (which control about three quarters of the world's oil reserves) more effective at finding and producing oil. Veneuzuela's oil output is flagging. Russia's state-owned gas company, Gazprom, is on the edge of a steep decline in production. And in different ways many of the world's state-owned oil companies are struggling to keep pace with rising demand. Simply privatizing them is politically difficult, and thus most of the world's oil-rich governments are struggling to find ways to make state enterprises perform better.

Even among state oil companies, Pemex's performance is notably poor. Used as a cash cow for the government, Pemex has never been able to keep enough of its profits to invest in exploration and better technology, the lifeblood of the best oil companies. Until a few years ago, Pemex invested essentially nothing in looking for new oil fields. It relied, instead, on the aging Cantarell field, which was discovered in the 1970s not by Pemex but by fisherman who were angry that the seeping oil was fouling their nets and assumed that Pemex was to blame. Pemex brought the massive field online with relatively simple technology. A scheme in the late 1990s extended the life of the field, but that effort has run out of steam. On the back of Cantarell's decline, total output from Pemex is sliding; some even worry that Mexico could become a net importer of oil in the next decade or two. They're probably wrong, but even the idea makes people nervous.

At times over the last few decades (including today) Pemex has been blessed with a dream team of smart managers, but even they have not been able to reverse the tide of red ink. That's because the company's troubles run so deep that even the best management can't fix them. Indeed, the most striking thing about Calderon's proposed reforms is that they don't go nearly far enough to make Pemex a responsive company, even though they are on the outer edge of what's probably politically feasible in Mexico.

For example, Calderon proposes a new system of "citizen bonds" that will help bring capital to the company (and because they would be owned by the public, these bonds would help blunt the legal block to any reform—Mexico's Constitution requires that its hydrocarbons be owned by the people). Money alone, though, won't reverse Pemex's fortunes. Part of the problem is that risk taking, which is essential to success in oil, is strongly discouraged. My colleagues at Stanford, in a study released last week, have shown that a system of tough laws that control procurement make managers wary of projects that could fail. Although such laws are designed to help stamp out corruption, a noble goal, they are administered by parts of the Mexican government that know little about the risky nature of the oil business.

Pemex's ability to control its own investment capital is probably more important to its success than anything else. The firm, though, has been hobbled because the government keeps all profits for use in the federal budget and the finance ministry has the final word on all Pemex investments. Solving that problem would require distancing government from the oil company. Given that the government is dependent on Pemex cash, that is politically risky. In fact, the real foundation for Calderon's reforms announced last week actually happened long ago when he first took office and spearheaded an effort to change Mexico's tax system. Much of the Mexican economy doesn't pay taxes to the government, which explains why its need for cash from Pemex is particularly desperate. Those tax reforms, however, are too modest to make a fundamental difference in the government's dependence on Pemex.

Calderon's reforms seem unlikely to solve the politically hardest task: reigning in the Pemex workers' union, which favors projects that generate jobs and benefits for its members. The union is well-connected to Mexico's left-leaning political parties, which helps explain why those same parties are so wary of "privatization." In fact, Calderon's proposals would not privatize the companies, but the union and the left know that cry will rally the people to prevent change.

Elsewhere in the world a thicket of similar, interlocking problems loom over the oil patch. Kuwait has a procurement system much like Mexico's, with a similarly perverse effect on the incentives for workers in that country's oil company to take risks and perform at world standard. Even in Brazil, whose state oil company is one of the best performing, has a hard time keeping the government at bay when it comes to taxing oil output. Two massive new oil finds over the last six months have kindled discussions in Brazil about raising the tax rate and channeling ever more of the oil output for government purposes. In Venezuela, where Chavez has taken a good oil company and run it into the ground, the burden of public projects is so great that the oil company can no longer focus on actually producing oil efficiently, and production is in decline.

The odds are that Calderon will make some reforms but won't transform Pemex. And that outcome, multiplied through state-owned oil companies around the world, suggests that oil output will increase only sluggishly. With demand still strong, oil prices are set to stay high for some time.

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China and India: Demographic and Economic Transformations in Progress

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The demographic billionaires China and India are experiencing rapid population changes and social shifts, fast economic growth, poverty decline, a booming modern business sector, and rising human capital in the labor force age groups.  Because 37% of the entire world population lives in these two countries, the breathtaking transformations in India and China are causing major dislocations in the global economy and big changes in measures of world development.  This colloquium will highlight the most important demographic, social, and economic trends happening in China and India today, will compare and contrast the current situations and future prospects of these two powerhouses, and will focus on implications for Asia and the world today and in the coming decade.

Dr. Judith Banister is the director of Global Demographics for The Conference Board, the world’s premier business research and business membership organization, with offices in New York, Brussels, Beijing, Hong Kong, and New Delhi.  She is an expert on the demography of China and received her Ph.D. in demography and development from Stanford.

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Judith Banister Director of Global Demographics Speaker The Conference Board
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Asia Health Policy Program

Armacost: U.S., South Korea must move past years of missteps

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Shorenstein APARC Distinguished Fellow Michael H. Armacost discusses U.S.-South Korea ties and points out challenges ahead. "From free trade to North Korea's nuclear threat," writes Armacost in the Christian Science Monitor, "both sides must move past years of missteps."

Stanford, Calif. - The visit this week of South Korea's new president, Lee Myung Bak, offers a rare opportunity to put the American-Korean relationship back on a more solid footing. President Lee, who won a decisive victory in last December's election, has expressed views on the security alliance, a bilateral free trade agreement, and policy toward North Korea that are thoroughly compatible with US interests. And Mr. Lee's authority was bolstered by his party's substantial victory in legislative elections April 9.

The question is whether Washington is poised to take advantage of this convergence of views.

For the past eight years, a major perception gap between Seoul and Washington has been painfully evident. Our governments often worked at cross-purposes in the six-party talks to denuclearize North Korea. Progressive governments in South Korea encouraged peaceful coexistence with the North through a pattern of unreciprocated engagement. For much of that time, the Bush administration sought to isolate and pressure Pyongyang into relinquishing its nuclear ambitions, and it made little effort to conceal its hopes for a regime change in Pyongyang.

When Washington decided to move its military headquarters out of Seoul in 2003, many Korean officials suspected that the Americans were just eager to get troops out of North Korean artillery range. President Roh Moo Hyun at times seemed interested in carving out a role as a balance wheel between the major powers in Northeast Asia. Meanwhile, the US was preoccupied by problems in the Middle East, and some American officials wondered if the US-Republic of Korea (ROK) alliance could long survive when one party dismissed the North Korean threat while the other viewed it as increasingly menacing.

Now comes Lee, a former mayor of Seoul and Hyundai construction executive with a reputation for tough-minded, pragmatic conservatism, eager to correct what he described as the misguided priorities of past ROK administrations. In a recent meeting with New Beginnings, a group of American policy experts on Korea, Lee appeared determined to accord priority to the alliance with the United States, exact a measure of reciprocity from the North, forestall major economic concessions to the North until it abandons its nuclear activities, and design a more ambitious global role for his country.

Surely Washington welcomes Lee's priorities. The tougher question is whether it can work effectively with him to translate shared aims into concrete results. This will pose three particular challenges.

First, on the nuclear issue, undeniably, bilateral talks with Pyongyang can facilitate diplomatic progress. There are dangers as well. Disconnects with the Japanese have deepened, and their officials occasionally complain about American "betrayals" in the discussions with Pyongyang. The North has consistently sought to use the negotiations to split the US and its allies. Success in the talks requires coordinated diplomacy between the US and the North's neighbors – especially with South Korea. In the past it often appeared that South Korean presidents worried less about Pyongyang's nuclear activities than Washington's possible reactions to them.

Today, there is the danger that South Korean conservatives may fear that Washington will ultimately acquiesce in North Korea's nascent nuclear status. No attempt to contain, let alone eliminate, the North Korean nuclear program can succeed unless the US and ROK governments work closely together. This will require a higher standard of candor and mutual trust in bilateral consultations than has been typical in recent years.

Second, the ratification of the Korea-US free-trade agreement (FTA) is a vital piece of unfinished business. Lee appears prepared to resume imports of US beef (halted due to mad cow disease concerns), essential to moving the FTA forward in Congress. Unfortunately, the Democratic presidential contenders are pandering to special interests on trade issues in a way they will probably later regret. Both sides have strategic and commercial interests at stake. The US stands to gain much more in increased exports from the FTA, while the Koreans hope that liberalizing foreign access to their economy will make them more competitive. So there is much to gain by nailing down this deal. A failure to complete it would be a significant strategic setback for our partnership.

Third, there is the question as to whether our political cycles will again diverge. For the past eight years, the US has been led by one of its most conservative administrations, while South Korea was headed by its most liberal president. Missteps were, perhaps, inevitable. And they have persisted, even though some effective work was done behind the scenes to forge cooperative arrangements on trade and force-deployment issues.

Lee's election signifies a conservative swing in South Korea's politics, while polls suggest the US may be moving in the opposite direction. Thus, a felicitous convergence of US and ROK official perspectives could prove fleeting. Yet the interests we share in expanded commerce, in modernizing our alliance, and in approaching the North with a joint strategy for "denuclearization" are compelling. They transcend partisan politics. They serve our respective national interests. The time to capitalize on them is now.

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Implementation of European Law in the New Member States of the EU

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Adoption of European law was a central part of the accession process of new member states of the EU but turned out to be much more difficult than implementation of European Law in the old member states. Problems included not only the amount of European legislation, its dynamic nature and language problems. Literal implementation resulted in diminishing the coherence of national legal rules and structures. In addition, legislation did not take account of national specifics and differences in legal culture. Built-up of working institutions and procedures takes time and efforts and deficiencies add to hampering implementation and application of European law.

Many problems of new member states in the accession process are present in the old member states as well. They may lead to a review of the European legislative process and structural reforms. The pace of legislation should slow down, it should be more reflexive and “re-connect” to the national and local level. Care should also be taken by national legislators in better integrating European law into national law. Structural reform would include strengthening of democratic institutions on a European level including the European court system. This should be accompanied by practical cooperation and mutual exchange.

Prof. Dr. Wiebe studied law at the University of Hannover, Germany, and at the University of Virginia (U.S.A.) where he received the LL.M. degree in 1988. In 2001 he completed his habilitation. Since Sept. 2002 he is a professor on the newly established Chair for Information Law and Intellectual Property Law at the Vienna University of Economics and Business Administration (www.infolaw.at). Prof. Dr. Wiebe is a member of various academic associations and Vice President of the German Computer Law Association (DGRI e.V.).

Stanford Law School
Room 182

Andreas Wiebe

Vienna University of Economics and Business Administration
Department of Information Technology Law and Intellectual Property Law
Althanstrasse 39-45
1090 Wien

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Distinguished Visiting Austrian Chair Professor, 2007-2008
Visiting Professor, Stanford Law School
Head of the Deparment of Information Technology and Intellectual Property Law, Vienna University of Economics and Business Administration
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Andreas Wiebe, LL.M., is Head of the Deparment of Information Technology and Intellectual Property Law at the Vienna University of Economics and Business Administration. From January through June 2008, Professor Wiebe served as Distinguished Visiting Austrian Chair Professor at the Forum on Contemporary Europe, during which time he taught courses in e-commerce law and intellectual property law at the Stanford Law School. Professor Wiebe co-organized the June 14 "Transatlantic Information Law Symposium," held at the Stanford Law School and presented by the Transatlantic Technology Law Forum and the Freeman Spogli Institute for International Studies.

Andreas Wiebe Chair for Information Law and Intellectual Property Law Speaker Vienna University of Economics and Business Administration
Seminars

Petrostate: Putin, Power and the New Russia

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In the aftermath of the financial collapse of August 1998, it looked as if Russia's day as a superpower had come and gone. That it should recover and reassert itself after less than a decade is nothing short of an economic and political miracle.
 
Marshall Goldman incorporated extensive research, including several interviews with Vladimir Putin, in his new revealing book that chronicles Russia's dramatic reemergence on the world stage, illuminating the key reason for its rebirth: the use of its ever-expanding energy wealth to reassert its traditional great power ambitions. Goldman traces how this has come to be, and how Russia is using its oil-based power as a lever in world politics. Goldman provides an informative overview of oil in Russia, traces Vladimir Putin's determined effort to reign in the upstart oil oligarchs who had risen to power in the post-Soviet era, and describes Putin's efforts to renationalize and refashion Russia's industries into state companies and his vaunted "national champions" corporations like Gazprom, largely owned by the state, who do the bidding of the state. Goldman shows how Russia paid off its international debt and has gone on to accumulate the world's third largest holdings of foreign currency reserves--all by becoming the world's largest producer of petroleum and the world's second largest exporter. Today, Vladimir Putin and his cohort have stabilized the Russian economy and recentralized power in Moscow, and fossil fuels (oil and natural gas) have made it all possible.
 
The story of oil and gas in Russia is a tale of discovery, intrigue, corruption, wealth, misguidance, greed, patronage, nepotism, and power. Marshall Goldman tells this story with panache, as only one of the world's leading authorities on Russia could.

About the Speaker
Marshall I. Goldman is the Kathryn W. Davis Professor of Soviet Economics Emeritus at Wellesley College and until he retired, the Associate Director of the Davis Center for Russian Studies at Harvard University. He earned a B.S. in economics from the WhartonSchool of the University of Pennsylvania (1952), and an M.A. and Ph.D. in economics from Harvard University, as well as an honorary Doctor of Laws degree from the University of Massachusetts, Amherst, 1985. He has also been elected to the American Academy of Arts and Sciences

Dr. Goldman’s publications include The Piratization of the Russian Economy, (Routledge April 2003), Lost Opportunity: Why Economic Reforms in Russia Have Not Worked (W.W. Norton, 1994), What Went Wrong with Perestroika: The Rise and Fall of Mikhail Gorbachev (W.W. Norton, 1991), Gorbachev’s Challenge: Economic Reform in the Age of High Technology (1987), The USSR in Crisis: The Failure of an Economic Model (1983), The Enigma of Soviet Petroleum: Half Empty or Half Full? ((1980), Détente and Dollars: Doing Business with the Soviets (1975), The Spoils of Progress: Environmental Pollution in the Soviet Union (1972), and Ecology and Economics: Controlling Pollution in the 70’s (1972). Dr. Goldman has published widely in Foreign Affairs, Atlantic Monthly, Boston Globe, Harvard Business Review, New York Times, Washington Post, and Los Angeles Times. He is a frequent guest on CNN and “Good Morning America” and has appeared on “NewsHour”, “Crossfire”, “Face the Nation”, “The Today Show”, “Nightline”, and NPR.

Dr. Goldman’s latest book, to be published by Oxford University Press in April, 2008, is Petrostate: Putin, Power and the New Russia.

This seminar is jointly sponsored by the Forum on Contemporary Europe and the Center for Russian, East European and Eurasian Studies.

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Marshall Goldman Professor Emeritus of Soviet Economics Speaker Wellesley College
Seminars

The End of Belgium?

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While the EU is continuing on its path toward more integration, various regions in several of its member states are demanding more autonomy. This evolution seems most pronounced in Belgium, which is going through a political crisis that may eventually lead to its break-up. This seminar will provide background for the current crisis, and will analyze its causes and the consequences for Belgium and the rest of the EU.

Christophe Crombez is a specialist of EU politics and business-government relations in Europe. His research focuses on EU institutions, the institutions' impact on EU policies under alternative procedural arrangements, EU institutional reform, lobbying in the EU, and electoral laws and their consequences for voter representation, party politics and government formation. Crombez has been visiting professor at the Forum on Contemporary Europe since 1999. Furthermore, he is professor of political economy and strategy at the University of Leuven in Belgium. He has been teaching in Leuven's economics department since 1994. Crombez obtained a B.A. (Licentiaat) in Applied Economics from the University of Leuven in 1989, and a Ph.D. in Business, Political Economics, from Stanford University in 1994.

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Christophe Crombez

Encina Hall
Stanford University
Stanford, CA 94305

(650) 723-0249 (650) 723-0089
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Senior Research Scholar at The Europe Center
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Christophe Crombez is a political economist who specializes in European Union (EU) politics and business-government relations in Europe. His research focuses on EU institutions and their impact on policies, EU institutional reform, lobbying, party politics, and parliamentary government.

Crombez is Senior Research Scholar at The Europe Center at the Freeman Spogli Institute for International Studies at Stanford University (since 1999). He teaches Introduction to European Studies and The Future of the EU in Stanford’s International Relations Program, and is responsible for the Minor in European Studies and the Undergraduate Internship Program in Europe.

Furthermore, Crombez is Professor of Political Economy at the Faculty of Economics and Business at KU Leuven in Belgium (since 1994). His teaching responsibilities in Leuven include Political Business Strategy and Applied Game Theory. He is Vice-Chair for Research at the Department for Managerial Economics, Strategy and Innovation.

Crombez has also held visiting positions at the following universities and research institutes: the Istituto Italiano di Scienze Umane, in Florence, Italy, in Spring 2008; the Department of Political Science at the University of Florence, Italy, in Spring 2004; the Department of Political Science at the University of Michigan, in Winter 2003; the Kellogg Graduate School of Management at Northwestern University, Illinois, in Spring 1998; the Department of Political Science at the University of Illinois at Urbana-Champaign in Summer 1998; the European University Institute in Florence, Italy, in Spring 1997; the University of Antwerp, Belgium, in Spring 1996; and Leti University in St. Petersburg, Russia, in Fall 1995.

Crombez obtained a B.A. in Applied Economics, Finance, from KU Leuven in 1989, and a Ph.D. in Business, Political Economics, from Stanford University in 1994.

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Christophe Crombez Visiting Professor, Stanford University Speaker
Seminars

The Outlook for Japanese Startups--Perspectives from a Japanese Firm's CEO

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About the talk
SPRIE's spring seminar series on the emerging environment for entrepreneurship in Japan has examined the state of venture capital (Michael Korver), changes in corporate governance (Robert Eberhart), and the division within Japanese society on the future of the Japanese economy (Yoko Ishikura).

Now, to conclude the series, Brian Nelson will provide his views on the outlook for Japanese startups--a unique perspective from the (non-Japanese) CEO of a Japanese Internet sales and marketing company.

About the speaker
As CEO of ValueCommerce, Brian Nelson negotiated and completed a TOB (Tender Offer Bid) with YAHOO! Japan in 2005. In 2006, he led ValueCommerce to a successful IPO resulting in a market capitalization of more than $300 million.

Prior to ValueCommerce, Nelson was Director of Sales and Marketing for the Gallup Organization in Japan. He also worked in Business Development with a non-life insurer, Tokyo Marine and Fire Insurance, and as a sales executive for Ashisuto, a Japan computer software company. Nelson has a degree in business administration from the University of Southern California. He has been a resident of Japan since 1990 and is a fluent Japanese speaker.

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Brian Nelson CEO Speaker ValueCommerce
Seminars
Entrepreneurship in Japan: New Patterns After Post-Bubble Reforms

Is Japan Creating an Entrepreneurial Economy?

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About the talk
Japan is at a critical turning point in 2008, with two opposing groups and views. One is the view that Japan, with its current social, political and economic system, will have difficulty renewing itself, while the other view is that the past success formula of a closed corporate innovation system supported by engineers and "hardware driven" technology is still viable.

With the accelerating pace of globalization and ICT, what will become of Japan, its private sector and public sector? Will its once-leading clean and green technologies survive and make an impact on the resolution of global issues? What are the potential areas for collaboration with the innovative and dynamic Silicon Valley?

About the speaker
As professor of business strategy and innovation at the Graduate School of International Corporate Strategy at Hitotsubashi University, Dr. Yoko Ishikura teaches the Competitiveness and Problem Solving courses, is responsible for the Executive Opinion Survey in Japan for the Global Competitiveness Report of the World Economic Forum, and is a member of the Council for Science & Technology Policy at the Japanese Cabinet Office.

She was a board member of Japan Post and Vodafone KK and is currently a member of the board at Mitsui OSK Lines and the advisory board of All Nippon Airways and is a frequent speaker/moderator at various international forums and seminars, including the Global Innovation Ecosystem Conference, the World Economic Forum and the World Knowledge Forum, among others.

She received an MBA from the Darden School, University of Virginia and DBA from Harvard Business School. She worked at McKinsey Inc. Japan in the late 1980s. Her “Act Globally, Think Locally” was one of the breakthrough ideas for 2007 in the Harvard Business Review.

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Yoko Ishikura Professor Speaker Hitotsubashi University
Seminars
Entrepreneurship in Japan: New Patterns After Post-Bubble Reforms
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