Duncan Wood
Director of the Mexico Institute
Woodrow Wilson International Center for Scholars
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Insight

Petrofied Politics No More?

Tue, 01/22/2013 - 13:35

Mexico is currently at a tipping point, according to Duncan Wood, President of the Mexico Institute at the Woodrow Wilson International Center for Scholars. If the right reforms and initiatives are implemented, the country will be able to take advantage of the multiple political, social, and economic opportunities available. However, if the necessary steps are not taken to achieve comprehensive fiscal and energy reform, Wood believes that by 2015 or 2016, Mexico’s oil production could begin to drop drastically, and the country could potentially face a serious economic and energy challenge. For this reason, Wood feels it is of vital importance for the Mexican government to overcome the various obstacles to a comprehensive energy reform.

The most important obstacle is political, since the balance of power in the Congress and Senate depends on the PAN’s willingness to cooperate with the PRI or ally itself with the PRD. “If the PAN Senators establish a working relationship with the PRI, we will be in an optimal position to pass an energy reform,” Wood explains. “But if they decide they are not going to agree to anything because of political pride, then neither the fiscal or energy reform will ever pass.”

here was a lot of skepticism about the possibility of any of the three reforms passing – labor, fiscal, and energy – but since the labor reform was passed in November 2012, followed by broad support for education and telecommunication reforms, people are optimistic about the prospects of the other two. However, Wood warns there is a limit to this positive outlook because there might not be su·cient political capital to agree on all three issues. One of the reasons for this skepticism is the PAN’s fervent desire for a shale gas reform. This could have a potential negative e†ect on a comprehensive energy reform because two separate energy reforms would be counterproductive.

Nonetheless, Wood seems quite optimistic about a fiscal reform – which in his opinion is crucial for a comprehensive energy reform: “It would be easier to agree on a fiscal deal than it would over energy. This is because, apparently, the PRI and the PAN have finally worked out a way to cooperate in Congress.” However, even though the fiscal reform is key to a successful energy reform, the Mexican economy is starting to pick up, growing at 3.9 percent for the full-year of 2012 and aiming for 6 percent at the end of Enrique Peña Nieto’s presidential term. This economic growth, which stems from Mexico’s ability to diversify its exports, would reduce the federal government’s dependence on Pemex. In turn, this means that a drop in oil revenue would not have such a big impact as previously thought, especially if favorable economic policies are implemented in the US, once a meaningful fiscal reform is implemented.

Wood believes Mexico is in an advantageous position to further grow and attract foreign investment because Peña Nieto is regarded as a brave, bright president, coming in with an exciting team, who can get things done. His reputation places him in an ideal position, but if he is not able to pass the energy and fiscal reform, foreign investors could react very quickly, and the honeymoon phase would be over. However, if the fiscal reform goes through, the odds of Mexico passing a successful and comprehensive energy reform would improve, which would bring foreign investment and ameliorate energy security for Mexico and the US. “On a regional basis, one could argue that North America is energy secure,” Wood believes. “But in terms of where we want to get to and what is coming up, energy security begins to look a lot more like energy vulnerability. Mexico needs to change from being vulnerable to being sensitive to be able to make adjustments as changes occur.” In order to continue down the positive economic, social, and political path, Mexico needs a comprehensive energy reform that gives Pemex the necessary tools to adapt to the current energy challenges and further improve energy security in North America.

Even though Wood seems skeptical about North America achieving energy security anytime soon, he is extremely hopeful Peña Nieto will show the expected political strength and wit. “From an international standpoint, Mexico looks very good right now; the strong fiscal position, particularly the international debt position that Calderón has built up, combined with the hope that things are now going to start happening, make the situation look very positive,” concludes Wood. During President Barack Obama’s visit to Mexico the controversial topic of foreign investment in Mexico’s oil industry was not brought up publicly in his meetings with President Peña Nieto, leaving further North American energy cooperation an ambition rather than policy for now