Hollowing out of Mexico?

By Fester:

I'm stealing an entire post from Zenpundit as it is excellent work in area that I don't have a lot of knowledge in:

Mexico’s equivalent to an acting FBI director was assassinated earlier on Thursday, most likely by Zetas or similarly skilled team of hitmen working for one of several of Mexico’s crime cartels currently being pressured by recently dispatched Mexican Army troops.

Reminiscent of attacks on the Italian state during the 1970’s and 1980’s by leftist Red Brigades and Mafia, the drug cartels of Mexico are hobbled neither by antiquated Marxist ideology nor old-time, rustic, crime family traditions. They are adaptive, professional, transnational in outlook and far better equipped than state police forces on either side of the border. Mexico’s corrupt political elite by contrast, cannot be bothered to restrain their greed enough to properly pay, train and arm the very security forces that defend their primacy.

I wonder how much capability the Mexican elites have to properly pay, train and arm loyal security forces as much of their hard currency cash flow is tied to oil, black market smuggling, remittances and foreign owned manufacturing plants that are located in the North to take advantage of labor and regulation arbitrage with the United States. Remittances and profits from the maquiladoras are hard to tap into for significant direct cash flows.  The remittances of migrant workers can be conducted on a dollar cash basis and through the informal economy as well as the formal economy while the maquiladoras always have the threat of relocating to China or Vietnam or India as a source of protection. 

That leads to the black market and drug smuggling revenue models and oil production as the two remaining and tappable sources of cash.  And here is where there is a significant problem.  The black market/drug smuggling cash flows are funding the fight against the current Mexican elites.  Any tapping into these flows further weakens the elite's moral claims and orientation as crosscutting incentives create mud, fog and friction in the multiple decision loops.  More corruption, more chaos, more unpredictability and disorder does not favor the entrenched elites. 

And then that leaves us with oil revenues.  Oil provides the Mexican state with 40% of its revenue but there are significant problems in the pipeline that could indicate a significant cash crunch.  The first and most obvious is that Cantarell, Mexico's largest oil field is experiencing significant depletion and declines in its production rate.  Other, smaller and more expensive fields are making up some of the lost production but PeMex is producing less oil now than they were three years ago.  Higher prices are masking the pain at this point but Mexico is entering the Export-Land problem.  Higher local demand is keeping more of its oil off the international market and thus leading to a decline in hard currency earnings.  One estimate is that Mexican oil exports could go from a 2007 average of 1.67 million barrels per day to less than 280,000 barrels per day in 2016.  Even projecting high per barrel prices this is a net decline in overall revenue and a massive decline in revenue per capita. 

So given these trends, how much ability does the Mexican elite have to maneuver?  Not much at first glance unless they can clean up their own acts to free up resources for effective, responsive and localized public good projects that can not be matched by the drug gangs which are seeking to create a hollowed out and ineffective state.