Will there finally be an oil reform?

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On Sunday, March 17, to mark the 75th anniversary of Mexican Oil Expropriation, President Peña Nieto warned that, although Mexico requires transforming its energy industry in a crucial and fast manner, PEMEX will not be privatised nor sold. A day later, Treasury Secretary Luis Videgaray called for more flexibility on the engagement of the private sector, so that PEMEX can use technology to accelerate the exploitation of energy resources. How does the current government plan to overcome the ancient resistance to the reforms? Will the Pact for Mexico ensure the support of the opposition in that particular matter? More importantly, how will Peña’s administration explain to the general public that the global energy context has changed so radically that not acting could result in an economic collapse or even worse, does the government not understand this new reality?

There is no getting away from the need for a substantial energy reform. Currently, there is a lack of capital and technology for deep explorations, which makes partnerships with private sector a critical necessity. In that regard, the 2008 reform was very limited when compared to the challenges that the sector faces. The main obstacle for its approval was mainly the absence of political agreements. In 2008, the ruling party did not enjoy a large amount of political legitimacy which diminished its ability to negotiate such an ambitious reform. On the other hand, the political context enabled some unity in the left, through Andrés Manuel López Obrador’s outdated discourse, which turned him in a favourable position with the general public and against the reform. At the same time, PRI didn’t have enough incentives to approve a reform that would affect the interests of its grassroots nationalists groups.

In 2013, context has changed and the configuration of political power now represents a window of opportunity that was absent during PAN governments. Even without an absolute majority in Congress, President Peña will not face such a belligerent opposition like his predecessor did. Moreover, there is a divided left which opens the possibility to negotiate with more moderate trends. Nevertheless, there are still some obstacles to be overcome such as the ongoing and strong idea that oil is a property of the nation, which makes a constitutional reform that would  allow flexible participation of the private sector a highly unpopular one. Another critical risk is the left’s “moderation expiry date”, particularly the trend that participated in the Pact for Mexico. On behalf of PAN, whose factions could get enough votes to modify the Constitution in a grand scale, its support for an opening-up is apparently guaranteed, though negotiations still need to be held.

Now, government must undertake a task in which its predecessors failed: an appropiate strategy of awareness-raising, socialisation and political power which will open channels for communication with key groups from civil society in order to build a strong support for the reform. Undoubtedly, the Pact for Mexico will not be enough. The key, however, will be to acknowledge who shall carry the political costs of its destruction. If the reforms do materialise and the growth expectations are met, the radical left will have lost its flagship. Instead, if political deadlock and “express reformism” manifest once again, the image of a succesful government that Peña has consolidated during his first months as President will suffer a major setback.

The political dynamics that serve as a framework from which the energy sector will be reformed are self-explanatory. What is not quite clear is the fact that the USA are undergoing an energy revolution that could transform the global economy. Three factors typify this revolution: first, USA are becoming the largest gas and oil producer worldwide, so much that self-reliance is not far away. Second, gas prices are now a fraction of their competitors’ around the world (less tan 3 dollars per BTU compared to China or Europe’s 20 dollars per BTU). Third, energy costs are leading to the  manufactory industry’s rebirth. Each of these factors represent a tremendous challenge for Mexico. For starters, oil produced in the USA or Canada is much lighter than the Mexican one, which makes it more attractive. Additionally, Mexico’s advantage on labour costs pales in comparison with the differences in prices of gas. Mexico, could end up with its oil but without its industry. This is a scenario that urges an energy sector reform, a priority higher than either Mexican legislators’ understanding about the matter or current political circumstances.

CIDAC

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