On the heels of an arbitrary — and, it turns out, unnecessary — deadline, Canada, Mexico and the United States have finalized a renegotiation the North American Free Trade Agreement (NAFTA). The new deal is called the United States-Mexico-Canada Agreement (USMCA):
What You Need to Know About the Election in Mexico
Mexico’s general election on July 1 will involve roughly 3,400 new elected officials taking office and $2 billion in campaign finance. It has been dubbed the biggest election in Mexican history.
It is important not only in terms of scale, but in terms of its new rules. For the first time, the ban on reelection does not apply and independent candidates can run.
This heightened capacity for change coincides with an electorate moving from apathy toward anger. Last year, only 18 percent of Mexicans told pollsters they were satisfied with their democracy, down from 41 percent in 2016. Institutional confidence is at a nadir.
Concerns about violence and insecurity related to drug cartels and organized crime are now coupled with deep frustrations about corruption and impunity as well as lopsided relations with the United States. Read more
As America Turns Inward, Europe and Mexico Double Down on Trade
The European Union and Mexico have committed to deepening their economies ties in the wake of Donald Trump’s inauguration as president of the United States.
In a statement released last week, EU trade commissioner Cecilia Malmström and Mexican economy secretary Ildefonso Guajardo announced that they would hold talks in April and June to renew a 2000 trade agreement between the two sides.
The EU hopes to expand the trade deal to broaden property rights protection, lower tariffs and include public tenders as well as trade in energy products and raw materials. Read more
The Republican Party’s presidential candidate Mitt Romney last month unveiled a plan to achieve North American energy independence in 2020. “This is not some pie in the sky kind of thing,” Romney told voters in New Mexico. “This is a real achievable objective.”
He may be right.
The United States Energy Information Administration estimates that by the end of this decade, nearly half of the crude oil that Americans consume will be produced domestically. By the 2020s, the United States could well export more oil than they import
American natural gas reserves are already the highest in recent history at three hundred trillion cubic feet. The gas production rate, expected to average 69 billion cubic feet per day this year, is also the highest ever. Americans consume about 28 trillion cubic feet of gas per year.
The EIA points to recent successes in shale gas exploitation as a “game changer” for the industry.
The proliferation of activity into new shale plays has increased dry shale gas production in the United States from .39 trillion cubic feet in 2000 to 4.8 trillion cubic feet in 2010 or 23 percent of American dry gas production. Wet shale gas reserves have increased to about 60.64 trillion cubic feet by year end 2009, when they comprised about 21 percent of overall American natural gas reserves, now at the highest level since 1971.
The agency puts technically recoverable shale gas resources at 862 trillion cubic feet, 34 percent of total gas reserves. By 2035, shale could account for nearly half of American natural gas production.
The Canadians, who consume less than six trillion cubic feet of gas per year, sit on 62 trillion cubic feet of proven gas reserves but are estimated to have up to 388 trillion cubic feet of shale gas resources. Mexico’s shale gas reserve could be nearly double that figure.
Canada was estimated to possess the equivalent of 179 billion barrels of oil reserves in 2007, 95 percent of which is situated in the tar sands of Alberta. Daily production in the province of 1.5 million barrels is expected to more than double in the next fifteen years.
If these trends persist, the three North American powers could be independent of oil and natural imports in a generation and become net exporters.
Although some of the votes are being recounted to ensure that there were no irregularities, there is little question that Enrique Peña Nieto won the presidential election in Mexico this weekend. After twelve years, it marks the return to power of the country’s Institutional Revolutionary Party which ruled Mexico for more than seventy years in what was widely regarded as an authoritarian manner.
Peña’s win is hardly a repudiation of Mexican democracy however. It rather signals a desire for change than a reminiscence for the days of single party rule. As the third place finish of the incumbent liberal National Action Party showed, Mexican voters overwhelmingly desire a different economic and a different security policy.
Drug related violence in Mexico has increased dramatically during the last twelve years while economic growth has been lackluster. During the worst of the 2008-2009 financial crisis, the Mexican economy contracted by almost 10 percent.
Of the two issues, security and the economy, the former has captivated the attention of international news media. Much has been made of the potential consequences of a PRI government for the war on drugs and Mexico’s relations with the United States. American officials worry that Peña will turn a blind eye to the cartels due to public pressure. This is unlikely. He faces several constraints to his actions.
Peña’s administration will be one of negotiations and commitments. The governors of Mexico’s northern states are unlikely to accept an army retreat. Moreover, Peña faces powerful adversaries within the party, including former Senate president Manlio Fabio Beltrones who will hold considerable clout in the new Congress. Finally, the PRI was not able to win an absolute majority in Congress. Peña will have to negotiate with other parties.
Although he has announced changes in security strategy — tackling specific crimes and increasing the responsibilities of American authorities — Peña’s election will not upset bilateral relations altogether. To combat the cartels, American-Mexican cooperation is an necessity.
More attention should be paid to Peña’s economic agenda, however, because if he manages to reduce public pressure on this front, Mexican authorities will be more able to implement a wide range of actions to thwart the cartels’ activities in cooperation with the United States. Unfortunately, the prospects do not look good.
While Mexico has recently surpassed countries as Brazil in terms of macroeconomic stability and growth, a report from the Center of Economic and Policy Research shows that average GDP per capita growth for 1980-2000 and for 2000-2011 has been stagnant: .8 and .9 percent, respectively. In other words, the expansion of the Mexican economy has not translated into more income per household.
Moreover, the financial crisis destroyed what had been gained in terms of poverty reduction. Though unemployment has decreased, it has still to reach its prerecession levels. Underemployment has doubled, from 6.3 to 13.2 percent while real wages have continued to shrink.
Peña has declared that his aim is to lift GDP growth by 6 percent per year. In order to achieve it, he has set several proposals of which the following are among the most important ones.
With respect to labor, Peña seeks to establish a beneficiary state and take measures so as to make wages grow faster than inflation. He has promised to boost tax revenues and decrease the government’s dependence on oil revenue. On the topic of public investment, his proposals are reminiscent of targeted industrial policy.
Peña has also declared that his government will deepen the strategic relationship with the United States but also work to increase South-South cooperation and trade with other emerging economies.
Finally, perhaps his most interesting proposals are strengthening competition regulations, which would affect monopolies, and advancing an energy reform to open the hydrocarbons industry, especially oil, to foreign investment.
Mexican experts have criticized Peña’s growth target as too optimistic and his proposals as too general and lacking quantitative, i.e., measurable, objectives. One of the reasons, as mentioned, is that Peña’s actions will be highly constrained by political realities. Approving the necessary reforms will require careful negotiation with interest groups, unions and opposition parties.
That is not to say that Mexico’s future is a gloomy one. On the contrary, as Fareed Zakaria recently argued, it is a nation on the rise. Mexico fares better than most of the BRICS countries in several categories, including the “ease of doing business.” But there is much more to be done. It will be up to the next government to implement the necessary policies to improve not only the macro but also the microeconomic situation in the country.
While his proposals have been justly criticized, Peña has surrounded himself with capable individuals such as his campaign coordinator, Luis Videgaray Caso, who holds a PhD in economics from MIT, and Emilio Ricardo Lozoya Austin, the former director of the World Economic Forum in Latin America. They will likely be part of Peña’s cabinet and be able to impact positively Mexico’s economic decisionmaking.
Oil Dependence Puts Mexico’s Energy Security at Risk
Despite having been favored with considerable hydrocarbon resources, Mexico’s energy security is in a dire state. Years of a corporatist and clientelist regime under the Institutional Revolutionary Party consolidated various structural flaws, preventing state-owned company Petróleos Mexicanos or Pemex from being able to adapt to changes in the energy market and the difficulties in upstream activities.
Four main challenges characterize Mexico’s current energy security situation.
The first is the continuous importance of oil for government revenue coupled with a diminishment of its production. Next are the insufficient technological capabilities of Pemex. The vested interests within the industry represent a third challenge. Finally, there is a blind belief in oil as the center of economic development that needs to be changed.
Regarding the first challenge, Mexico’s oil production peaked in 2005 and has since diminished to a stable production of approximately 2.4 million barrels per day. Nonetheless, the percentage of government revenue obtained through oil exports has not varied greatly and, in fact, absolute quantities for 2010 and 2011 were larger than those for 2005 and 2006.
Clearly, the rise in international oil prices has helped the government to counter the diminishment of production. However, prices remain too volatile, as their sudden fall after the 2008-2009 financial crisis demonstrated.
The macroeconomic scenario does not look too promising in terms of stability. According to the World Bank’s Global Economic Prospects 2012 report, developing countries will be hard hit if the eurozone crisis worsens since they have already spent the greater part of their fiscal resources to counter the effects of the downturn in 2008.
Not surprisingly, Mexico’s current administration has tried to revamp oil production and recover its 2005 production levels. This has proven difficult given Pemex’ technological deficiencies on the production side.
The Chicontepec Basin, for instance, in the northeast of Mexico is believed to contain fifteen billion barrels in reserves. Due to its geological complexity, recovery rates range from just 6 to 8 percent.
Pemex also lacks the necessary capabilities to do deepwater drilling, thus preventing it from tapping the resources in the “deep Gulf of Mexico.”
Moreover, Pemex lacks the necessary refining capabilities to process the majority of its heavy oil which constitutes more than half of its total production.
In order to satisfy its domestic demand for refined fuels, Mexico has had to export most of its heavy oil to the United States, one of the few countries with the necessary technology to process the Mexican oil mix, and import it back as a processed product.
While Mexico’s oil exports to the United States represent more than 70 percent of its total exports since 2000 and more than 80 percent in the first months of 2011, they only amount to 9 percent of American total crude oil imports. In other words, the United States have a diversified supply base, which has reduced the vulnerability of its energy security to external shocks. Mexico, on the contrary, has become dependent on American consumption.
Certainly, Mexico should have enough incentives to invest in the necessary technology to be able to refine it. However, as Carlos Dominguez explains in “Beyond Efficiency: The Politics of Investment Policies in the Oil Industry,” (PDF) published in The Future of Oil in Mexico last year, efforts to improve the Mexican oil industry have been hampered by “discretionary policymaking in the infrastructure sector, the role of technical experts and their vested interests, and the interaction between politicians and technical experts that has become open ended and unpredictable as political power is redistributed in Mexico.”
Thus, contrary to other nations, like China, which are also dependent on natural resource imports, Mexico has been inefficiently dependent. The Chinese government understands that it needs to promote efficiency and innovation for its industry to reap all the benefits of the world energy market. For their part, Colombia’s Ecopetrol and Norway’s Statoil are among the most efficient companies in the world.
Because of these vested interests, overcoming the constitutional barrier to reform the country’s energy sector, which is already difficult, seems impossible. (According to the Mexican constitution, oil is the property of the nation, which has granted legitimate monopolistic production rights to Pemex.)
Moreover, any event within the oil industry has immediate public opinion effects. Mexicans have traditionally reacted negatively to any action considered as “foreign intervention.”
Interest groups and politicians have taken advantage of this, politicizing any possible oil issue, shielding themselves in the Constitution and preventing the advancement of necessary reforms in the sector. Hence it will be very difficult to open the oil market to the much needed foreign investment.
Perhaps the biggest challenge that Mexico faces regarding its energy security is its blind belief in oil as the center of economic development. Certainly, current oil prices can justify the emphasis that a government gives to its production. However, it seems as if Mexico treats oil as a mythical product that will solve all of its problems.
It is quite disturbing that before the development of the National Energy Strategy and its publication in 2011, Mexico did not have an official definition of energy security.
The NES sets three objectives to increase Mexico’s energy security: to regain the 2005 levels of production (3.3 million barrels per day) by 2025; to maintain a 100 percent rate of restitution of proved reserves between now and 2025 and to maintain a 15 percent margin of gasoline supply.
The strategy mentions renewable resources but it does not include any measurable objective for them. More importantly, renewable resources and natural gas are seen as conducive to increase environmental sustainability. The strategy report does mention the volatility of energy markets yet it does not set any objective with regards to diversifying the energy portfolio or reducing the government’s dependence in oil for revenue.
This is unfortunate. Mexico has huge potential in other types of resources such as solar, wind and thermoelectric energy. Also, the country currently holds the fourth largest reserves of shale gas. More attention should be paid to the development of these resources.