2024: The Year of Energy in Mexico

On this occasion, I  will leave aside the well-known deep technical analysis of the different business segments within the Mexican energy sector in favor of a brief turn toward an issue of great importance for the near future of this industry and the country itself.

Mexico, as a country, has been in constant evolution and development, to the extent that, in the period between 1994 and 2018, it sustained significant economic growth and enhanced the quality of life of its residents. All this is due to changes in economic policies that, of course, feature prominently in the energy policies that have been pursued by each of the federal administrations since then.

Including  the famous "Oil Expropriation" of 1938, the energy industry has been a protagonist in the most important economic processes in Mexico; however, the natural wear and tear of the conduct of the industry under the tutelage of the Mexican state made it financially unviable for the federal government to continue sustaining it. As a result,  between 1998 and 2005, a series of actions were launched in the segments of LPG and natural gas to dissociate the state from the stewardship of the energy sector and provide greater intervention by the private sector.

Subsequently, between 2012 and 2013, the structural constitutional reform known as the Energy Reform was implemented. It would shape the energy sector in Mexico today, including  all its issues.

These changes were directed by the Mexican political class, with incipient help from the private sector.  This segment (politicians) undoubtedly imprinted the energy sector with a marked ideological bias reflecting the political party that held power  in Congress and of the federal government itself, all while maintaining the strong component of public companies in the energy sector.

In this way, we arrive at the year 2023, with a public administration led by politicians who, at the time (2012 to 2019), criticized the Energy Reform in multiple ways, but paradoxically, have skillfully used that controversial legal framework to elevatePEMEX and the Federal Electricity Commission (CFE) at the expense of taxpayers' money, the regulatory institutions of the energy sector and the economic stability of Mexico in the North American region. That is, until the enormous wear and tear on each of those entities became evident, as it is today.

Without going into greater detail about the worrying context that surrounds state companies, public finances or international controversies due to abuses in the energy market by government actors, all of which have already been widely described and analyzed by countless specialists in the sector, we are already entering the final stretch of President López Obrador’s federal government in charge of and the convulsive political situation that Mexico is currently experiencing (incidentally, it is a similar situation in all countries on the continent), which is further aggravated by the upcoming electoral process.

Thus, 2024, an election year in Mexico, becomes a key piece for the contemporary history of this country, since an economically outstanding nation at the geopolitical level has as its developmental foundation three fundamental axes: water, energy and territory.

This trilogy seems primitive, but every model of sustainable development or ESG integrates it unequivocally and, above any political or ideological current, they will always be present; however, it is important to point out that while these factors will always be the same (water, energy and territory), the results will be totally different when applying public policies with factual or ideological biases.

This is where the Mexican election year of 2024 becomes important, since, as has already been highlighted, the Mexican state today is showing signs of total wear and tear on energy matters and, therefore, all the legal, institutional and financial elements that make it up. As a result, there is an  urgent need to “shift gears,”  both in public policies and within the institutional structures and internal market of the Mexican energy sector.

This necessary shift in how  the energy market in the country is conceived must start from a scheme that puts the consumer, the environment and the market at the center of the matrix. The state must be relegated to a mere regulatory auditor, definitively eliminating its aspirations of being a preponderant participant in the energy market, with tax revenues  the main way for it to be productive and meet government budget objectives. At the same time, the private sector should be substantially re-empowered, for which, unlike what the vox populi surmises, a strong component is national capital (in general terms, we are talking about 70% of private national capital).

Regarding the productive enterprises of the state, it would be advisable to consider a gradual process of disincorporation of nonproductive assets, as well as the diversification of what today are natural monopolies inherited from a political and ideological past but that currently are a heavy burden in terms of their operation and finances. That is, get rid of CFE, PEMEX, and all those areas that are not profitable. This does not require a deep analysis; it is enough to review the quarterly financial reports of each company.

Finally, another of the necessary aspects of this new energy vision of the country is to eliminate the exclusivity of the federation in the regulation and powers of action over the energy sector. It is extremely necessary to have diversification toward the local authorities, which understand first-hand the needs of the population they serve on a daily basis, as well as recognizing the existence of very wide industrial, commercial and tourism corridors that have special energy requirements and that, within the current legal model, are not effectively addressed. This issue in particular is of utmost importance for the well-known  nearshoring that is causing so much stir lately in the North American region. Importantly,  it is an area of opportunity that has not been well exploited by Mexican governments (federal and local).

As we can see, 2024 will not only be key for life and the national political pulse in Mexico, but also for its immediate and intermediate future. Given the country’s size and importance, it would be nonsense to continue at the current pace.