Oil Expropriation in Mexico

We explain what the oil expropriation was in Mexico, its background, its protagonists and how the conflict was resolved.

What was the oil expropriation in Mexico?

In the history of Mexico, the process of nationalization is known as oil expropriation, that is, of appropriation by the State of all the property and assets of foreign companies dedicated to the oil industry in exchange for compensation. It took place during the presidency of the Mexican military man and politician Lázaro Cárdenas (1895-1970).

It was an event of utmost importance in the contemporary history of Mexico. It occurred through the application of article 27 of the Mexican Constitution and the Expropriation Law of 1936, through a presidential decree signed on March 18, 1938 the date on which this event has been commemorated since then. Its main result was the birth of the state company Petróleos Mexicanos (Pemex).

The oil expropriation was motivated by the existing labor conflict between the Mexican oil workers unions and the numerous foreign companies dedicated to the exploitation of this resource (mainly Americans and British). These included affiliates and subsidiaries of Royal Dutch Shell, Standard Oil Company of New Jersey, Sinclair Pierce Oil Company, Consolidated Oil Company, and many others.

The breaking point that led to the expropriation was the non-compliance by these companies with the ruling of the Federal Conciliation and Arbitration Board, later ratified by the Supreme Court of Justice of the Nation, which after a workers' strike ruled that The oil companies had to improve the salary of all their workers.

Background of oil expropriation in Mexico

At the beginning of the 20th century, oil production and exports in Mexico increased. The oil companies were private and foreign, mostly British and American. In the final years of the so-called Porfiriato, the regime of Porfirio Díaz (1830-1915), the Petroleum Law of 1901 was approved, which allowed private companies to exploit oil on Mexican soil and exempted them from paying taxes, along with with another series of privileges that sought to encourage investment and the import of equipment.

When the Mexican Revolution began in 1910, revolutionary governments attempted to modify tariff agreements, but foreign companies managed to exert diplomatic pressure and postpone the changes. Thus, a period of conflicts between the Mexican State and the oil companies followed.

The Mexican Constitution promulgated in 1917 included in its article 27 the principle that all resources of the national territory, both above and below ground, belonged to the Mexican nation. However, the Bucareli agreement of 1923 between the governments of Mexico and the United States guaranteed respect for the property of foreign companies in Mexican territory.

With the Petroleum Law of 1926, decreed by President Plutarco Elías Calles (1877-1945), certain reforms were achieved, despite the fact that Mexico was immersed in the Cristero War (1926-1929) and under great foreign pressure. In 1928, a new agreement was reached with the United States in which the property rights of the oil companies were confirmed. Little changed during the Maximate, but President Abelardo Rodríguez (1889-1967) created the state company Petróleos de México (Petromex) in 1934 to compete with foreign corporations.

In 1935, President Lázaro Cárdenas formed an alliance with oil workers and advocated for the creation of the first unified union of oil workers the Oil Workers Union of the Mexican Republic, despite the opposition of the companies, which preferred to have separate unions with which to negotiate.

This was the first step towards the negotiation of a collective contract, and was accompanied by the promulgation of the Expropriation law in 1936 which allowed the State to take properties considered of public interest and set a period of ten years to compensate the owners.

Finally, in 1937, despite concerns expressed by American diplomats over recent changes in the law, the General Administration of National Petroleum (AGPN) was also created, which responded directly to the Executive Branch and absorbed the functions of Petromex. That same year a strike by oil workers took place.

The oil expropriation

In 1938, the labor conflict between the oil union and the companies reached its climax. Following the companies' refusal to comply with the demands for better salaries that the Conciliation and Arbitration Board had ruled, On March 18, President Cárdenas signed a decree in which he ordered the oil expropriation. Thus, it granted the State direct and legal control over facilities, equipment, buildings, refineries, distribution stations, vessels, pipelines and all movable and immovable property of foreign oil companies.

This measure had significant popular support expressed in street demonstrations, in which many people made donations to help pay compensation for the company owners. Even the Catholic Church and other conservative sectors, generally opposed to the government, agreed with the expropriation.

Soon diplomatic protests from the United Kingdom, the Netherlands and the United States arose who refused to recognize the expropriation and demanded the payment of compensation. The three countries demanded payment not only for the seized goods, but also for the fuel not extracted from the subsoil, which the Mexican government refused because it considered it the heritage of the Mexican nation.

Thus, diplomatic relations between Mexico and the United Kingdom were suspended. Although negotiations with the United States were friendlier, they soon The oil companies of the three countries began a commercial boycott against Mexico to prevent him from accessing the machinery and petrochemical inputs necessary for oil refining.

In addition, Mexican oil goods stored in European and American ports were seized, and the Mexican government managed to sell only a tiny part of the fuel that these companies formerly exported, through negotiations with some American transportation companies, such as Davis & Co., and later with other refining companies, such as Eastern States Petroleum Co.

Finally, companies were forced to recognize Mexican sovereignty over oil and negotiations for compensation were resumed.

The end of the conflict

The development of the Second World War (1939-1945) ended the conflict for Mexican oil, since the American president Franklin Delano Roosevelt (1882-1945) was more interested in having the presence of Mexico in the anti-fascist alliance than in protecting the interests of the expropriated oil companies.

Thus, in 1941 diplomatic relations between Mexico and the United Kingdom were normalized, and the United States government signed a good neighbor agreement with the Mexican government. Devoid of diplomatic support, the oil companies had no choice but to negotiate the payment of their respective compensations. In 1942, the Mexican and American governments agreed on the amount to be paid.

The total compensation debt to the Standard Oil Company and other American companies was settled in 1947 and amounted to $30 million at the time. On the other hand, in 1962 the entire compensation to Shell was settled, corresponding to 130 million dollars at the time.

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References

• Office of the Historian. (sf). Mexican Expropriation of Foreign Oil, 1938. United States Department of State. https://history.state.gov/
• Rivera Castro, J. (2008). The oil expropriation. Historical roots and response of foreign businessmen. House of Time, 1(8), 2-7. https://www.uam.mx/
• Agri-Food and Fisheries Information Service. (2020). Mexico 82 years after oil expropriation. Government of Mexico. https://www.gob.mx/
• The Editors of Encyclopaedia Britannica. (2024). Mexican Petroleum. Encyclopedia Britannica. https://www.britannica.com/
• Von Wobeser, G. (Coord.) (2014). History of Mexico. Economic Culture Fund.