Mex­ico’s pow­er­ful en­ergy re­forms

Financial Mirror (Cyprus) - - FRONT PAGE -

Mex­ico is poised to be­come Latin Amer­ica’s eco­nomic star in the com­ing decade. The gov­ern­ment’s re­cent re­form of the en­ergy sec­tor will con­trib­ute di­rectly to eco­nomic per­for­mance by re­duc­ing the cost of man­u­fac­tur­ing. In the con­text of the North Amer­i­can Free Trade Agree­ment (NAFTA), the re­sult­ing in­crease in man­u­fac­tur­ing com­pet­i­tive­ness prom­ises to boost Mex­ico’s growth sub­stan­tially.

Un­til the gov­ern­ment adopted the nec­es­sary con­sti­tu­tional amend­ment and en­acted the as­so­ci­ated en­abling leg­is­la­tion, Mex­ico’s en­ergy sec­tor was en­tirely sta­te­owned. The sec­tor’s most im­por­tant com­po­nent, Pe­mex, owned all of Mex­ico’s oil and gas re­serves, and was ex­clu­sively re­spon­si­ble for ex­plo­ration, pro­duc­tion, and re­tail dis­tri­bu­tion. Elec­tric­ity pro­duc­tion and dis­tri­bu­tion, too, was en­tirely in the hands of the gov­ern­ment.

Pe­mex’s limited meant that it could tech­ni­cal not fully

know-how de­velop and ex­ploit Mex­ico’s vast oil and gas re­sources. There are sub­stan­tial oil re­serves that re­quire deep-wa­ter drilling tech­nol­ogy that the company lacks. There are also old wells that have stopped pro­duc­ing but that could be made pro­duc­tive again with mod­ern tech­nolo­gies. And there are po­ten­tial gas and oil fields that can be tapped only with the new tech­nolo­gies of frack­ing and hor­i­zon­tal drilling.

Un­til the re­form, en­ergy re­serves had long been re­garded as a na­tional pat­ri­mony that could be de­vel­oped only by Pe­mex. Be­cause the con­sti­tu­tion pro­hib­ited any di­rect or in­di­rect for­eign own­er­ship, there was no way to pro­vide in­cen­tives for for­eign firms to share their tech­nol­ogy.

But that for­eign tech­nol­ogy of­fered such im­por­tant po­ten­tial gains that Pres­i­dent En­rique Pena Ni­eto was able to mar­shal a majority in the Mex­i­can congress to amend the con­sti­tu­tion and pass leg­is­la­tion that will bring for­eign en­ergy firms to the coun­try.

Open­ing the en­ergy sec­tor com­pletes the agenda of eco­nomic in­te­gra­tion that be­gan when NAFTA was ap­proved in 1994. That agree­ment trans­formed Mex­ico from a very closed econ­omy with few man­u­fac­tur­ing ex­ports into an econ­omy that is now closely linked with the United States.

The ex­pan­sion of Mex­i­can



gas pro­duc­tion will con­trib­ute to in­de­pen­dence.

Mex­ico’s man­u­fac­tured ex­ports have in­creased ten­fold since NAFTA be­gan, with roughly 80% now go­ing to the US. Many multi­na­tional US com­pa­nies have lo­cated plants in Mex­ico as part of their over­all pro­duc­tion process, which is closely tied to in­puts sourced do­mes­ti­cally. In­deed, man­u­fac­tur­ing re­la­tions be­tween the US and Mex­ico are such that some 40% of the value added in Mex­i­can ex­ports to the US is ac­tu­ally of US ori­gin.

The new en­ergy re­forms will also al­low Mex­ico to ben­e­fit from lower-cost gas from Canada. The price of gas in the US and Canada is only about half the cur­rent price in Mex­ico (and less than half the price in Europe and Asia). Mex­i­can ac­cess to cheaper gas will boost Mex­i­can petro­chem­i­cal in­dus­tries and lower en­ergy costs for man­u­fac­tur­ing. Ex­perts es­ti­mate that the cost of elec­tric­ity to Mex­i­can man­u­fac­tur­ers could fall by as much as 20%.

Pri­vatis­ing Pe­mex and the na­tional elec­tric company will also al­low trained, pro­fes­sional man­agers to re­place state bu­reau­crats and bring an end to trade unions’ cur­rent ma­jor role in the man­age­ment process. Fur­ther­more, pri­vati­sa­tion will re­move the con­straints on in­vest­ment that the con­sol­i­date those links and North Amer­i­can en­ergy gov­ern­ment bud­get has im­posed on Pe­mex and the elec­tric company.

Even be­fore the en­ergy-sec­tor re­forms, Mex­ico had been pur­su­ing sound macroe­co­nomic poli­cies for a con­sid­er­able pe­riod of time. As a re­sult, the coun­try has ben­e­fited from low in­fla­tion, small fis­cal deficits, and man­age­able cur­rent-ac­count deficits. And, though Mex­ico op­er­ates a freefloat­ing ex­change-rate regime, the peso’s value against the dol­lar has been sta­ble.

None of this is to deny that Mex­ico still must con­front other sig­nif­i­cant prob­lems. For ex­am­ple, pri­mary and sec­ondary ed­u­ca­tion needs im­prove­ments that the teach­ers’ unions are block­ing, and crim­i­nal ac­tiv­ity, much of it drug-re­lated, makes per­sonal se­cu­rity a se­ri­ous con­cern through­out the coun­try.

But, de­spite such prob­lems, the en­ergy and elec­tric­ity re­forms, and the deeper links with the US and Canada that they im­ply, prom­ises to ac­cel­er­ate Mex­ico’s growth rate, boost em­ploy­ment and in­come, and thus raise Mex­i­cans’ stan­dard of liv­ing.

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