Is Mexico’s Energy Approach Sustainable?

Demand and availability of energy has been impacted this year, especially by the Russian invasion of Ukraine, which immediately altered the price of oil. Now, we are seeing a growing crisis of skyrocketing electricity prices in many countries in Europe, which is linked to Russian pressure to reduce gas supply. In the meantime, we have also seen a swift return to coal and nuclear energy in many countries as alternatives to meet demand, and altering with this the dynamics of the energy transition, at least for now.

Inflation, meanwhile, has become the biggest threat to economic stability in most of the world, where the common, or orthodox, solution has been to raise interest rates. Mexico has also adjusted interest rates, mainly in reaction to US rates (of course, there is not much choice there, given the connectivity between our economies), but unlike the US government, Mexico has subsidised gasoline prices by offsetting the special tax. This has had an impact on government revenues, estimated this year at +/- US$20 billion. On the other hand, the higher oil price has brought additional revenues compared to expectations set in the government budget, which somehow is offsetting the bleed. Unfortunately, this approach cannot be sustained for much longer without impacting gasoline prices next year as well as additional pressure to the government finances. 

We also need to keep in mind that this year there has seen a significant reduction in recoverable oil resources. According to Rystad Energy, recoverable oil is now 9 percent lower than the previous year. While  less oil utilisation is fine for the environment, the real threat is weaker stability in global energy supply. 

Against this backdrop, undue stress is being generated on the energy sector because of the Mexican government’s insistence on a nationalistic approach to the energy sector, irking our main commercial partner, the US. Clearly, Mexico has not honored some of the guidelines of the USMCA and will probably end up losing the contested controversies in discussion at the time of writing. 

Regarding these controversies, I was under the impression that the Mexican government was going to soften its position if the political environment took the discussion elsewhere, but that does not seem to be the case for now.

The insistence in Mexico to achieve energy autonomy by influencing the application of rules to give PEMEX and CFE a predominant and controlling position in the energy market is not even realistic, given the capabilities of both entities, neither of which is capable of fully supplying the domestic market without the participation of the private sector. To this end, for instance, the Dos Bocas refinery has clearly blown its construction budget, just as predicted by the vast majority of experts. In  the end, the budget for Dos Bocas will probably triple and, even worse, even with the combination of the refinery acquired from Shell (Deer Park) and the Dos Bocas refinery (assuming it produces at 100 percent) the production of gasoline won’t be enough to cover domestic demand. Hence, we will still need to import gasoline. At the end of the day, the total investment in Dos Bocas is probably enough to buy a midsize oil company such as Ecopetrol, which recently decreased in value after the latest Colombian presidential elections.

At this point, it is clear that oil and gas will continue as the main sources of energy in the world. In Mexico, it is clear that the focus is on fossil sources, which is not necessarily bad in extraordinary times like the period we are living in, with a  pandemic followed by a Russian invasion and now economical limitations and instability, but it definitely is not sustainable for the future. Sooner or later, the lack of competitiveness combined with pressure from our partners in the USMCA will force major changes in the energy policy. That is an undeniable fact.

So far, oil prices are staying high and continuing to put a brake on global economic activity.  Inflation will continue as the main economic concern, at least for the rest of this year, and although Mexico seems to be reaching a reasonable level of inflation compared with its commercial partners, if there is no change or adjustment soon in the direction of its energy policy, the risk is that it will lose traction when a change in speed comes in terms of  economic dynamics. That's when a more diversified and flexible source of energy will be needed., Unfortunately, foreign investment in this sector is more on the “see you soon” side rather than providing the certainty needed for the long term. We also need to keep in mind that 50 percent of Mexico’s prospective oil resources are buried in the Gulf of Mexico waiting to be further explored and used eventually before it is too late.

Mexico cannot ignore for much longer the advances of the energy transition experienced in other countries. The direction and speed of change will certainly increase  pressure on Mexico to find its rightful place in such a transition. We will need to find an adequate balance between the capacity to produce energy, the ability to supply that energy with fair prices and a limited impact on the environment, which is what energy security is all about, rather than the sterile discussion over foreign or domestic investment linked to these sovereignty idea that clouds the clarity of ideas in decision-making in the energy sector by the Mexican government.