Big Vote South of the Border

12/06/2013 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

In Mexico, there's an important vote in the coming week and MoneyShow's Jim Jubak explains why the outcome is important for the Mexican economy and US investors.

I know that everybody's trying to figure out what the fed is going to do and taper, no taper, what jobs numbers, how fast the US economy is growing, but for the week ahead, let me draw your attention to Mexico, because I think in this time span, what's going to happen in the Mexican congress is really, really important for investors, as well as for people who live in Mexico and depend upon the Mexican economy.

What, right now, looks like the schedule is, there's going to be a vote in the senate about changing the basic constitutional law that governs oil production in Mexico, that, basically, Pemex is a state owned company, has a monopoly on oil production, oil drilling, oil investment, et cetera, that dates back to the current Mexican constitution and the expropriation of international oil companies' assets in Mexico in the 1930s.

This would be a huge change. The problem right now is that Pemex is a big source of revenue for the government, about 40%, or so, of government revenue comes from the oil company, but that's meant that over time, Pemex has been starved for capital, and Mexican oil production has gone down, because, simply, Pemex doesn't have the money to invest in the latest drilling technology—all the really expensive stuff that enables you to extract more from existing reservoirs as well as to find deeper reservoirs. There's clearly a lot of oil in the Gulf of Mexico that's not being tapped.

If you had a big infusion of capital, and technology from international oil majors, you'd be able to increase Mexican oil production and that would have huge impacts on the Mexican economy, where Mexican oil—Mexican energy prices are so much higher than the US, even though it's just right across the border. Mexico strikingly imports natural gas from the United States, not enough volume to drive down prices, but strangely, since we think of Mexico as being an energy exporter, and would also mean that the current Mexican manufacturing revival would not be short-circuited by those higher energy costs, so this is a big deal vote.

It's very, very contentious, it's a very huge political and emotional issue in Mexico, because it's sort of the foundation of Mexican—in some way—economic independence is to own its own oil, so this has to be very carefully written, but, at the moment, it looks like the vote is going to go forward, there is going to be some opening for international investment in the Mexican oil industry, and that will be a big deal, and that would open up all kinds of things for US oil companies, as well as for sellers of oil technology and equipment, and you might want to take a look at a company like National Oilwell, symbol is (NOV), which sells the equipment, not the oil drillers, but it sells the equipment that works on oil drilling rigs, or maybe something like Flowserve, (FLS), which provides valves, and pumps, and all of that to big equipment providers that could do really, really well if this goes forward, so let's watch, put your eyes on the Mexican congress for the next week.

This is Jim Jubak for the MoneyShow.com video network.

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