177. Memorandum From Secretary of State Vance to President Carter1
- Mexican Natural Gas
As requested, I have reviewed Jim Schlesinger’s memorandum on Mexican gas negotiations.2 It is a thorough analysis of the technical aspects of the gas question. From the perspective of our overall relationship with Mexico, however, I am concerned that the analysis does not fully take into account the critical importance of increased U.S.-Mexican cooperation in areas such as migration, trade, and energy. In particular, I believe that Jim’s proposed strategy of going back to the Mexicans with an offer essentially the same as the one rejected by Lopez Portillo a year ago could adversely affect your trip3 and the longer-term prospects for U.S.-Mexican cooperation.
The Mexicans view these gas negotiations as an indicator of our interest in over-all cooperation. They have displayed anger and bewilderment over the events which led up to the suspension of discussions last year. While their reaction may be part of the bargaining process to some extent, the outcome apparently has left Lopez Portillo personally troubled and has provided a major focus for domestic criticism of his efforts to strengthen ties with the U.S. The Mexicans see us as paying very high prices for Algerian or Indonesian liquified gas, but vetoing a deal negotiated between PEMEX and U.S. companies which would cost American consumers much less than this other imported gas—or than the gas we are planning to bring down from Alaska. While they can understand our concern with the effect of a Mexican deal on the Canadian price, they are also aware that this concern has not deterred us from arranging for gas from these other sources at even higher prices than the Mexican proposal.
Against this background, I fear that Jim’s going-in offer will not provide a basis to continue the discussions. It is essentially the same offer we made a year ago—$2.60 price when the gas starts flowing in 1980, with an escalator related to the inflation rate and/or world oil price increases. It would come after another round of OPEC price increases and after press reports of high level attention to Mexican policy [Page 569] in the U.S. Government. Lopez Portillo could cut the dialogue short and your visit would take place under adverse conditions.
This is not to say that we should simply accept the Mexican price. At the very least, I think Jim should consider how to make sure that our positions are presented in such a way as to keep the negotiations going forward. He might emphasize that he is talking about general pricing concepts (not hard and fast numbers) and that the actual purchase would be negotiated in detail between private companies and PEMEX. When you visit Mexico, you could discuss the gas issue briefly and in general terms (since in any event the Mexicans would not want a commercial transaction to become the focus of your state visit) and set the stage for serious commercial negotiations commencing after your visit, in an atmosphere that will increase—rather than diminish—the chances for growing cooperation between our two countries in the decades ahead.
In preparation for these negotiations, I question whether our ultimate fallback should be, as Jim proposes, a link to residual fuel oil that closes less than half of the price gap between us and the Mexicans. In light of the larger stakes we have in U.S.-Mexican cooperation, I am not sure we can afford to adopt as a final bottom line a proposal that refuses to meet the Mexicans half way.
Mexico’s population may exceed ours in a few decades. With a 2,000-mile border and 160 million legal crossings (and about a million illegal crossings) a year, with narcotics a major concern, with a level of bilateral trade exceeded by only four countries, with Hispanics soon to be our largest minority, with the real possibility of social turbulence in Mexico in the coming decades as migration, income-disparity, urbanization and unemployment all increase, it is in our interest to work closely with Mexico—not antagonistically.
A policy of waiting three or four years to pressure a weaker Mexico into submitting to our terms would, I believe, be detrimental to our national interest. A more dramatic concrete example of North-South confrontation could not be imagined—right on our own borders. We are likely to pay for it in many ways—in reduced cooperation on narcotics, migration, trade, border issues, and also politically within the Hispanic community. Although Jim may be correct that Mexican gas will flow into the U.S. market in the next few years, the Mexicans have demonstrated over the years that they are capable of making decisions to their economic detriment where national pride is involved.