For 16 days, they blockaded the halls of congress. For 16 days, they chanted in the streets. Until finally, victory was theirs... the bill was struck down, the enemy bested.

They sang the national anthem and raised their fists in victory. Senator Carlos Navarrete, leftist leader of the Mexican senate, was especially joyful. "We triumphed! We triumphed!"he said.

What the victors did not realize -- or refused to recognize -- is that their "triumph" merely took Mexico one step closer to the brink, to a deep, dark chasm into which the entire economy could fall...

Monday was Cinco de Mayo, the "Fifth of May," so it's fitting to touch on Mexico this week. Many believe Cinco de Mayo is to Mexico as July 4th is to the United States, but that isn't quite true. It's actually a regional holiday for the state of Puebla. (Mexican independence day falls in September.)

In other news, crude oil hit new record highs above $120 a barrel this week. Arjun Murti, the Goldman Sachs analyst who first called for a $105 oil "super-spike" three years ago, now sees the possibility of $200 crude in the next 12-24 months.

You might not see the connection between Mexico and the price of crude at first glance. But believe me, the connection is there -- and it's frightening.

Let me explain...

Bigger Than Exxon

Though not a member of OPEC, Mexico is the seventh-largest oil producer in the world. Petroleos Mexicanos, or "Pemex," is the country's state-owned oil company. Pemex pumps out more oil each year than Exxon.

Needless to say, oil is a key driver for the Mexican economy. The cash flow from Pemex alone pays for 40% of Mexico's federal spending.

Imagine if the U.S. government drew nearly half its funding from the revenues of just one company. That would be one heck of an important company. You would think the powers that be would do everything in their power to keep the cash flowing in.

You would think... and yet, Mexico's oil giant is headed for collapse.

According to Bloomberg, Pemex is plagued by "too little investment, high taxes, laws that forbid competition, corruption, and corroding and exploding pipelines." That's just for starters.

A Budding Crisis

It's not as if the Pemex crisis is new. Observers have been sounding the alarm with ever-heightening concern for at least the past decade. In the past few years, though, things have taken a serious turn for the worse. The company's 110,000 union workers are poorly trained and hard to control. Fatal accidents are increasing.

Worse still, Mexico's oil fields are running dry.

Take the Cantarell field, for example. Cantarell is Mexico's biggest field. In fact, it's the second-largest oil field on the planet, behind only Ghawar in Saudi Arabia. In 2005, it came to light that Cantarell production had declined rapidly. "Fallen off a cliff" is how some might put it, in terms of the speed and suddenness of the drop.

If Cantarell production spirals downward into collapse, then Pemex -- and, by extension, the entire Mexican economy -- will be in deep, deep trouble. Mexico's finances have been boosted in recent years by the sky-high price of crude, and those extra dollars have hidden Pemex's behind-the-scenes problems. But fewer barrels from the ground means fewer dollars in the bank. Eventually the dropoff becomes too big -- and too painful -- to ignore.

Mexico's Energy Minister predicts that, without new production, the country could be forced to import light crude for gasoline by 2011. (Most of Mexico's oil is of the heavy, sour variety.) By the year 2016, Mexican oil exports could plummet from 1.67 million barrels per day, last year's levels, to a shockingly low 289,000 barrels per day. That's quite a dropoff.

Think how much the world's oil thirst has grown these past eight years. Now think how much it will grow in the next eight years. Now consider how tight the supply-demand situation has already become -- and imagine pulling another 1.4 million barrels or so off the market.

Too Deep to Contemplate

The funny thing is, Mexico has more oil that hasn't been tapped yet -- maybe a lot more.

Bloomberg again has the details: "The Mexican Energy Ministry estimates 30 billion barrels of oil and gas are sitting below deep water on the Mexican side of the Gulf of Mexico. Yet it's unclear whether Pemex, which hasn't been permitted to form partnerships with foreign oil companies, has the technology, money or competence to drill successfully."

The problem comes down to technology and experience. To conquer the deep water and drill for oil 10,000 feet down, you need a heaping helping of both. Pemex has neither. The company's engineers are not savvy enough, its technology not nearly cutting-edge enough, to handle the challenge of deep-water drilling in the Gulf.

This is where politics comes in.

Almost all Pemex profit -- and as much as 60% of sales revenues -- goes straight to the government. At the end of the day, the company is little more than a cash cow for the state. And because the Mexican presidency can only be held for a single six-year term, the holder of that office typically cares little about long-term planning. The focus is on spending for the here and now instead.

The nature of the beast explains why Pemex is poorly outfitted and poorly run. Political promises are expensive and Pemex cash is there for the spending; only scraps are left over for upgrades and maintenance. Can you imagine running a company whose masters have no regard for the future? I can't. Perhaps that's why Pemex has had four different CEOs and five chairmen in the past eight years. Most of them threw up their hands and quit in disgust.

Calderon vs. the Leftists

It's a dire situation, but there is one small hope on the horizon. Felipe Calderon, Mexico's current president, has finally taken the bull by the horns. Calderon realizes that if big changes aren't made soon, Pemex will be in real danger of collapse... and the Mexican economy, too.

To avert disaster, Calderon wants to bring in outside partners for Pemex. He reasons that, if Mexico doesn't have the know-how or the tech to handle deep-water drilling, it only makes sense to call on those who do.

There are plenty of savvy oil majors who would love to lend a hand. Brazil's Petrobras is the leading candidate, with oil majors like Exxon and Royal Dutch Shell close behind. In other words, the deep-water expertise Mexico so desperately needs can be had… for a price.

The trouble is, Mexico's leftists refuse to pay that price, and the law is on their side. Tragically, the Mexican constitution bars Pemex from forming partnerships with foreign oil companies. Mexican oil is apparently so precious, it's better to leave it under the sea than let some outsider get their greedy mitts on even a fraction of the spoils.

It's hard to understate the madness of this socialist sop. What kind of sense of does it make to bleed a vital enterprise dry, and then refuse it the ability to find help? In gobbling up Pemex's cash and denying it the right to partner, this is exactly what Mexico has done.

It's been said that Lenin would rather let his people starve than allow a private market in grain. Sentiment among Mexico's left-wing patriots seems to run along similar lines. In their effort to ensure that every last drop of Mexico's oil profit is reserved "for the people," the people are put in grave danger.

Blockading Congress

Now we cycle back around to the opening story.

The 16-day blockade mentioned at the beginning of this piece just took place; left-leaning lawmakers were protesting a new bill floated by President Calderon. The bill was designed to -- you guessed it -- allow Pemex to engage in foreign partnerships.

Talk of "semi-privatization," even on a very modest scale, set the leftists' blood boiling. Calderon quickly denied any intent to privatize, saying he only wanted to open up new avenues for Pemex. But his ideological enemies would hear none of it.

The people, egged on by populist sentiment, decided to tilt against the bill, too. Andres Manuel Lopez Obrador, failed presidential candidate and bitter enemy of Felipe Calderon, led a march of thousands through the streets of Mexico City. Hopes of change were dashed, at least in the short term.

This blinkered attitude is the "hole" that could swallow Mexico. It's a giant, gaping logic hole -- one that the entire Mexican economy could fall into. One could also argue there is a hole in the Cantarell field, or that Pemex itself is in a deep hole, and in dire need of help to pull itself out... but let’s stop there.

More Profits, More Pain... or Both

So how will things turn out for Pemex? With the supply-and-demand equation as tight as it is, this is no idle question. Mexico simply can't afford to let Pemex slide into oblivion -- and neither can the world.

World demand for oil might dip in the event of global slowdown, but that dip is guaranteed to be temporary. The supply side math is tough, and yet the demand side math is tougher still. Not a barrel of crude can be spared, especially with the world's biggest fields headed for terminal decline.

At some point, Mexico's self-important leftists will have to face reality. The Pemex debacle can still be papered over, for now, thanks to the glut of cash flooding in. But the longer the wake-up call is put off, the more it will hurt when it comes. (A frying pan to the face comes to mind.)

There is some good news to consider. When Pemex is finally allowed to bring on deep-water partners, there will be a gusher of profits -- not just for Petrobras or Exxon or Shell, or whoever steps up to lend a hand first, but also for the various oil service companies, drill rig companies and extraction technology companies that will come in, benefit from spillover activity, and so on.

Of course, one can rarely count on politicians to catch on quickly. If the Mexican government drags its feet in getting help for Pemex, and the foot-dragging goes on for months or even years yet, that just means more upward pressure on the price of oil. It's little wonder Arjun Murti thinks $200 a barrel could arrive in the next two years.

Curse Not the Gas Pump

There isn't a whole lot you or I can do here, other than watch and worry and prepare for what might come. But that doesn't mean we have to be victims. We can recognize what's happening, and invest accordingly.

To that end, I urge you to check out our various newsletters: BreakAway Investor, Material Profits, the Taipan flagship letter, and so on. The Taipan team has come up with a number of excellent ways to profit from these inevitable oil and gas trends... and there will, no doubt, be many more opportunities to come.