Is Mexico About to Collapse?

Oil, drug money, and enablers all impact the economic probability of Mexico’s survival.

“For each one of mine that you kill, I will kill 10 soldiers.”

That was the note that accompanied the severed heads of eight soldiers and a former state police director.

The beheadings were not done by al Qaeda, nor did they occur in some little-known region of Afghanistan. These men were horribly mutilated and murdered by Mexican drug lords.

But the deaths were bought and paid for with American money from American citizens.

Who Will Rule Mexico?

The government of Mexico is locked in a life-and-death struggle for control of the nation. Over the past two years, over 6,000 police officers and other public officials have been assassinated. Drug lords are waging an all-out battle, and civil war threatens. Who will rule Mexico?

The simple economics suggest the government doesn’t stand a chance.

It gets down to this: Mexico is in atrocious financial shape. Unemployment is high and escalating. Mexicans living in the U.S. are sending less money home. Food prices are pinching budgets, and social unrest is escalating. The list goes on: Mexico’s metals and mining industry is getting hammered. Commodity prices have plunged, and exports have constricted due to the global economic slowdown. On top of all that, the government is about to lose much of its single most important and vital source of money—oil revenue.

In contrast, the incredibly violent and ruthless drug cartels, which are trying to overthrow the government, are funded by the biggest, most free-spending, and addicted market in the world: U.S. consumers. Also assisting the cartels are American black-market arms smugglers.

The big money is backing organized crime. Who do you think is going to win?

Mexico’s Budget Drying Up

A whopping 40 percent of Mexico’s budget is derived from oil sales. As the third-largest supplier of oil to America, Mexico sends most of its oil north to gas stations across the United States.

Since last year, however, oil prices have plummeted from near $140 per barrel to less than $40. Earlier, when oil was costlier, the Mexican government locked in contracts to sell its oil for $70 per barrel. By the end of 2009, those contracts will expire. If oil prices don’t rebound, the government could easily see 15 percent or more of its total budget disappear.

But the problem is much worse than that. Mexico’s oil production is also plummeting, so the budget deficit could be even greater. Total oil exports to the U.S. plummeted about 17 percent in 2008, and that followed double-digit declines in 2006 and 2007.

Government mismanagement has added to these geological constraints, which means production probably won’t recover anytime soon, if ever. If trends continue, analysts predict that Mexico could cease exporting oil within four years!

This is a huge issue for Mexico. Oil revenue bankrolls the war against the drug cartels. And even at current budget levels, it is still not clear whether the government is winning or losing.

Two years ago, Mexico was forced to employ its army to battle the drug lords since its domestic police forces were deemed too corrupt. However, as the analysts at Stratfor have noted, the longer the war drags on, the more infiltrated and corrupt the army will become. Morale, which is chronically low during the best of times, is being pushed to the breaking point.

It is not just a battle against drugs, guns and crime, but also against time. And time, as well as money, is on the side of the drug runners.

The Money Supply

America is the world’s largest cocaine consumer, and about 90 percent of what is sold in the United States comes from Mexico. In fact, Americans spend $142 billion a year on illegal drugs, which is fully 44 percent of global consumption. And most of the distribution networks into and throughout the U.S. are dominated by Mexican criminal groups, according the Bureau for International Narcotics and Law Enforcement Affairs.

With so much money in play, these drug cartels are getting stronger, better armed, bolder and more violent. They are spending their cash on cross-border tunnels nine stories underground—on semi-submersible vessels that can evade radar and travel at 20 knots.

“The cartel has become far more brutal,” says the U.S. Drug Enforcement Administration’s Alan Poleszak. “Civilians used to be off limits but now it kills wives and children, and tortures in new ways. Beheadings are recent, too. They walked into a disco and dropped three heads in the middle of the floor to prove the cartel still rules” (Times, June 15, 2008).

Yes, thanks to America’s drug addiction, Mexico is in the thralls of a full-scale war that is killing its policemen and public officials at more than triple the rate that the Iraq War is killing U.S. troops. Three towns have seen the entire police force quit out of fear of the gangs.

Alternatively, cartels invest some of those American billions into putting the authorities on their payroll. Using these two tools—lethal violence and filthy riches—they have been extremely successful in harassing and bribing government officials into compliance. “Government officials are human,” writes Stratfor’s George Friedman, “and faced with the carrot of bribes and the stick of death, even the most incorruptible is going to be cautious in executing operations against the cartels. … There comes a moment when … government officials, seeing the futility of resistance, effectively become tools of the cartels” (Stratfor, May 13, 2008; emphasis ours). Already in many Mexican cities, the police and politicians have been bought off; drug lords rule.

When that happens enough, the state ceases to function as a state.

In Mexico, the nation’s rule of law is turning into the law of the jungle.

The U.S. State Department has issued travel alerts, warning that American tourists could face the “equivalent to military small-unit combat” if they cross the border.

Adding a layer of shame to the situation is this fact: The cartels are getting almost all of their weapons—over 90 percent—from the United States. The cartels will pay top dollar for these arms—including high-powered assault weapons and grenades—and unscrupulous American gun smugglers have proven willing to oblige them. “If I don’t do it, someone else will. That’s the bottom line,” one American told the bbc of his wicked business.

Unsurprisingly, the bitter fruits are spilling back over into the U.S. The geographic location of Mexico in relation to the U.S.—and the porous border between the two countries—provides Mexican drug cartels comparatively easy access to the American market, which is the biggest in the world. And the U.S. Department of Justice acknowledged in a December report that Mexican drug traffickers “represent the greatest organized crime threat to the United States.”


Last June, the House of Representatives approved $1.1 billion in drug war aid to Mexico. The deal, which was announced in October 2007, included a plan for the U.S. to send helicopters and technical assistance over a three-year span.

This money will change little. Aside from the possibility of that aid being diverted by military and police forces that are on the pay of the cartels, it simply does nothing to address the fundamental cause of the whole problem.

One-point-one billion in counternarcotics efforts will simply be dwarfed by the nearly half trillion that junked-out Americans will pay to the cartels over those three years!

Unless something changes, the economics suggest that Mexico’s war for survival may be a lost cause.

Things will likely get much worse. Mexico is one of two countries that “bear consideration for a rapid and sudden collapse,” the U.S. Joint Forces Command on worldwide security threats said in a January report. The other country is Pakistan.

America’s increasingly unstable southern neighbor is in the middle of a war for its survival, and the situation could melt down quickly. Our Mexican readers would do well to be wary of these conditions.

And at a time when America’s economy is also facing collapse, an unstable neighbor is the last thing America needs.