Mexico Will Follow Egypt Into Collapse

by: Bill James

Mexico seems likely follow Egypt into collapse within two years based on falling oil revenue and rising food prices:

  • Mexicans spend about 22% of their disposable income on food. In 2010 corn prices increased 52% and wheat 47%. With the floods in Australia, ethanol in the U.S. and higher fuel prices it seems likely food will consume 50% of disposable income within a year. That is an average. There will be a critical percent of the population where food costs will exceed their disposable income. Hunger will amplify risks.
  • Mexico's government gets about 40% of its revenues from oil. As noted in BP data complied at Energy Export Database Mexico's domestic consumption (black line) will force its oil revenues (green area) to drop to zero within a few years. Egypt's oil revenues dropped to about zero in 2010.

Export Land Model, MexicoClick to enlarge
(Click to enlarge)
Export Land Model - EgyptClick to enlarge
(Click to enlarge)

Without the ability to feed its people or fund its security forces, it seems unlikely Mexico will remain a viable government. Drug wars illustrate the strength growing in local war lords. The U.S. Joint Forces Command's JOE-2009 noted Mexico as at risk. U.S. border states will likely destabilize. Without cheap oil, the U.S. military is completely unprepared to defend these states from mass migrations.

Without oil from Mexico, one of the U.S.'s top three suppliers, the economic dislocation in the U.S. will be fundamental; even if oil could be purchased from the Middle East, the number of tankers required for the additional days of transport do not exist and cannot be built in time.

If I were China, as economic disruptions slash U.S. imports from China, I would dump dollars and offer to convert trade agreements to Yuan backed by China's manufacturing base. If China can make the Yuan the world's reserve currency for a $ trillion dollars, it will be the greatest single business deal in all human history. If this occurs, Yuan holdings will be very attractive. China's economy is more dependent on coal than oil. They have 100+ million electric motor scooters and different expectations than the U.S.

Investing in this environment is complicated by the wild randomness of potential outcomes. There is no way to gauge how individual companies will manage events. So my wild guesses are based on the fundamental fact that life requires energy. Less affordable energy, less life. More efficient use of energy, more life. Since we all wish to survive, resources will flow towards solutions.

Least risky investments:

  • Companies that create economic output without dependence on oil. Examples are solar and wind manufacturers.
  • Store of value: precious metals.
  • Natural gas assets will at least double in value.
  • Logistics: railroads and agriculture supply companies.
  • Yuan.

Risky investments:

  • Government bonds to build oil-powered infrastructure and car companies. There will not be affordable oil to power them.
  • Real estate in border states.
  • Companies dependent on manufacturing in Mexico.
  • Oil companies. Without Mexico's oil, oil will likely be nationalized and rationed. Until nationalization, the volatility trade will be attractive if it can be managed.
  • Companies dependent on cheap oil for profits.
  • Banks, unemployment will jump up and land values down. The public will not tolerate a second bank bailout.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Author is founder and shareholder in JPods, Inc. a Personal Rapid Transit company.