Over the last couple of years, Mexico has made substantial proposals and changes to oil and energy exports under President Andrés Manuel López Obrador’s government. Commonly referred to by his initials “AMLO,” López Obrador began planning and enacting multiple updates to oil production and exports that could drastically impact global trade, especially for the United States, China and others who heavily rely on Mexican fuel imports. But to understand the impacts, it’s important to get the full picture of Mexico’s energy sector and the proposed changes.
Mexico’s oil and energy industry has been controlled by the federal government for over six decades. This changed in 2014 with the passing of the Electricity Industry Law (LIE) which encouraged private firms to participate in wholesale energy production and distribution.
What’s Currently Happening with Mexico’s Energy Sector?
Over the last year, AMLO has made many efforts to expand Mexico’s domestic production and consumption of energy rather than exporting a large portion of their supplies. One of the biggest announcements includes Mexican state-owned fuel producer Petróleos Mexicanos (Pemex) reducing their crude oil exports to just 435,000 barrels a day through 2022 and completely ceasing foreign exports in 2023. Supporters of this effort are hopeful the shift will allow Mexico to avoid importing more costly products like gasoline and diesel from U.S. refineries, and instead work toward producing their own.
If these reforms are enacted, it will reverse Mexico’s previous commitment to an independently regulated and market-based energy sector that encouraged private investments in electricity to further innovation. Two of the primary regulatory bodies (the National Hydrocarbons Commission and the Energy Regulatory Commission) will be banished, relinquishing regulation to the Energy Ministry and the state-owned power company: The Federal Electricity Commission (CFE).
AMLO also placed Mexico’s customs operations under military control and suspended the permits of multiple fuel storage terminals that are owned by U.S. companies and run by private fuel station operators. Additionally, Mexico’s social and environmental agency deployed the national guard to inspect fuel-related locations, which resulted in 40 full or partial temporary closures of sites with alleged violations of environmental impact rules. Then, under much controversy, Mexico’s tax authority changed Mexico’s General Rules for External Trade to essentially ban private companies from acquiring necessary permits for fuel terminals and suspended 82 companies from trading fuels due to “fiscal violations.”
The Main Criticisms of Mexico’s Actions
Economic Strain
While there are some staunch supporters of AMLO’s efforts to increase domestic fuel production and limit foreign exports, many energy experts are worried that self-sufficiency is not economically attainable for Mexico. If there is no backup plan to replace income from the fuel exports (perhaps through tourism or the service sector), Mexico’s economy could be at risk.
Much of the energy production would be routed to the CFE which relies on an expensive and inefficient infrastructure. Because of the higher cost of production, the price of energy could increase, leading to financial strain on end consumers. Even though AMLO has claimed consumers will not see an increase in price, the government would likely use subsidies to offset the expenses, removing those available budgets from other valuable public funds.
Environmental Impact
The other major criticism revolves around climate change and Mexico’s previous commitments to improving environmental protections. By canceling renewable energy auctions and increasing power created by the CFE, the amount of available renewable energy will dwindle. Solar and wind energy are also lowest in the list of energy priorities because they rely on private suppliers who will encounter many obstacles for production under the proposed changes. Mexico’s Civic Observatory of Air Quality even argued that these efforts could violate the human right to health and result in more premature deaths due to air pollution.
There is a big question lingering: Will Mexico still meet its climate goals?
As a participant in the Paris Agreement, Mexico committed to reduce greenhouse gas emissions by 22% and CO2 emissions by 51%, and meet 35% of Mexico’s energy needs with renewable energy by 2024 (currently at 31%). But Mexico’s dams are already producing less and less electricity while Pemex and CFE funnel most of their investments towards fossil fuels instead of renewable energy sources.
How Will the Changes to Mexico’s Energy Exports Affect Global Trade?
There is no doubt that AMLO’s desire to take Mexico out of the global fuel trade will have major impacts. In 2004, Pemex exported almost 2 million barrels of oil a day to Japanese and Indian refineries. Their pledge to reduce and cease foreign exports will remove one of the biggest oil producers in the market.
Asian refineries compose over 25% of Mexico’s exports and will see the largest impact from Mexico’s reforms. However, the United States would also feel the repercussions. The U.S. would need to rely on countries further away like Russia, Saudi Arabia, etc. which would substantially raise freight costs and reduce refinery capacity. Overall, U.S. consumers could see higher prices at the gas pump.
“Multinational companies who have invested in Mexico to reduce operational costs may need to look for alternatives as the prices of fuel and transportation begin to rise. While investments in technology may help, financing their exports would provide a solution for improving cash flow in order to alleviate higher costs.” – Olga Santiago, RTS International Business Development
AMLO’s plans have caused the U.S. to pressure Mexico into reconsidering, citing a violation of the United States-Mexico-Canada Agreement (USMCA) which forbids state-owned enterprises from receiving preferential treatment in an effort to reduce monopolies. If AMLO does not change his proposals, and a ruling is made in favor of the U.S., Mexico could face penalties like duties on imports and exports, negatively impacting the Mexican economy.
Overall, the divisive reforms proposed by AMLO have caused unrest domestically and internationally. It is unclear whether he will concede and/or compromise on any of the changes, or force action by the U.S. in the months to come.