Mexico's Energy Reform: Opportunities for the United States

Energy reform would positively affect Mexico's economy and upstream oil production capacity, strengthen U.S. energy security, and provide greater opportunities for energy development and trade in North America.

By Alejandro Garcia
Contributor
November 4, 2013

Mexican oil production has been steadily decreasing since 2004, mostly due to aging oil fields, years of underinvestment, and diminishing returns for the nation’s largest oil field, Cantarell. The U.S. Energy Information Administration (EIA) estimates Mexican oil production will continue to decline over the next decade, assuming no dramatic changes in policy or technology. President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI) introduced an energy reform proposal in August 2013 aimed at attracting greater investment from foreign companies to help boost oil production and build a stronger economy. His proposal includes constitutional amendments that would allow PEMEX to undergo profit-sharing contracts with private companies without affording them concessions. The Mexican oil industry would look similar to those of Brazil and Norway, which have state-owned companies that welcome foreign capital to invest in exploring and developing their fields. Experts suggest the administration has the necessary votes to pass legislation for constitutional change, but Peña Nieto is facing considerable opposition from a public that is skeptical of privatization and his greater reform agenda.

PEMEX is more than an oil company; it is a patriotic symbol for Mexican independence and progress that has had a monopoly over oil for the last 76 years. Some view the energy sector in Mexico as a strategic tool to defend paternalistic values and enhance international prestige, making reform is a sensitive issue. Former presidential candidate Andres Lopez Obrador has organized protests to stymie the president’s reforms. The largest demonstration to date occurred on October 6 in Mexico City, where as many as 12,500 citizens gathered to express their discontent. The political dynamics in Mexico make the future of its energy sector uncertain. The Mexican congress is expected to vote on the energy proposals sometime this fall. In the end, secondary laws will be the ones that indicate how open Mexico will be to foreign investment.

Economic Opportunities

Mexico is the United States’ largest trading partner, so economic growth in Mexico is of great importance to the United States. Because the oil industry accounts for a significant portion of government revenues, PEMEX's economic competitiveness (or lack thereof) directly impacts Mexico’s overall economic development. A liberalized oil sector would likely lead to more jobs and added competitiveness on the international market. The country's economy is expected to grow just two to three percent this year, and some economists believe the best case scenario for increased oil production capacity would add between one and two percentage points to potential growth. The United States would also benefit as major oil companies such as Exxon and Chevron may begin to invest in Mexico’s oil sector. Since a central U.S. foreign policy priority for the Western Hemisphere is to support trade and sustainable economic development, the United States should endorse Mexican energy reform.

Energy Security

A reform agenda that boosts oil production in Mexico would be beneficial to the United States' energy security. Countries enhance their energy security – the affordability and reliability of supply – when they are able to diversify their supply sources and decrease their dependence on any one energy type or source. Oil is a particularly critical source of energy in the United States as it currently meets nearly 40 percent of U.S. energy needs, totaling 94 percent of energy use in the transportation sector. Terrorism, political instability, geopolitical rivalries, nationalist sentiments, and rapidly growing demand by emerging economies can disrupt the United States’ oil supply and threaten its ability to meet its energy needs. As of 2011, about 40 percent of crude oil and petroleum products came from members of the Organization for the Petroleum Exporting Countries (OPEC). Larger energy exports from Mexico to the United States would decrease dependency on OPEC and unstable regions of the Middle East. Mexico is already one of the United States’ most important suppliers of oil, but it will have difficulty meeting demand (domestically and in the United States) if PEMEX is unable to boost its upstream oil production. Natural gas production within the United States has been a major enabler of greater energy independence, but diversification – having the ability to import from various nations and having alternative energy sources – is key to enhanced energy security.

North American Energy Alliance

There is potential for the Western Hemisphere to be a stable and reliable energy supplier, and PEMEX reform could provide the stimulus needed for a North American Energy Alliance. Latin America possesses the second largest oil reserves outside the Middle East. Governments should aim to deepen economic ties and strengthen competitiveness to ensure North American companies are positioned to succeed in an increasingly competitive global market. Expanding offshore oil production would strengthen the energy trading relationship between Mexico and the United States. Critics emphasize expanding offshore drilling would slow investment in clean energy projects and contradict efforts at combatting the negative environmental effects of climate change, but a practical path to a sustainable energy future requires supporting domestic or regional supply additions for both oil and natural gas. A free-trade zone for energy that encourages private sector engagement would strengthen economies, reduce the United States' oil dependence from unstable regions, and provide an institutional framework for building a more reliable energy infrastructure.

Alejandro Garcia is a graduate student at the Elliott School of International Affairs in the Security Policy Studies program. He has a double bachelor's degree in Geography and Latin American Studies from the University of California, Los Angeles.

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