Commentary
1:12 pm
Fri December 13, 2013

Look West, Miami, At Mexico's Epic Oil Reform

Drilling for oil in southern Mexico
Credit Flickr
Press Listen to hear a radio version of this report

When it comes to Latin American oil, South Florida’s attention seems exclusively fixed on South America. We focus on petro-titans like Venezuela and Brazil because we do so much trade with and receive so many immigrants from that region. But this week it was hard not to look west – across the Gulf of Mexico, at one of the most important oil reforms in almost a century.

Late Wednesday night, Mexico’s Congress approved President Enrique Peña Nieto’s plan to allow private and foreign participation in the country’s state-run oil industry for the first time in 75 years.

Few if any nations in the western hemisphere have so jealously guarded their petro-sovereignty. In an interview with Peña Nieto days before his inauguration last December, I asked him if he thought Mexico’s strong nationalistic streak would really allow the oil overhaul he’d pitched on the campaign trail. “It’s a sensitive national issue for Mexicans,” he admitted. “But I think in modern times, if we’re going to realize our energy potential…we have to let the private sector in.”

The fact that Peña Nieto pushed the legislation through Congress just a year after he took office suggests many if not most Mexicans agreed with him – and that his ruling Institutional Revolutionary Party (PRI) had the clout to pull it off. There was some intense resistance, of course, including one demonstration by a leftist lawmaker who stripped to his underwear during congressional debate to symbolize what he called the rape of Mexico’s patrimony.

But Peña Nieto seemed able to convince Mexicans that private participation will not mean private ownership – that Mexico will still control the oil. The measure, which requires a constitutional amendment, is expected to be approved by a majority of states.

Mexico’s state-owned oil monopoly, Petróleos de México, or Pemex, has long been considered an inefficient and underachieving petro-slacker. Over the past decade, thanks largely to lax investment and technology, its production has fallen 25 percent from 3.3 million barrels per day (bpd) to less than 2.5 million. Industry analysts say the reform – which will green-light oil and natural gas production-sharing contracts and licenses for private drilling giants, including U.S. firms – could ramp up energy investment in Mexico by some $15 billion a year and boost crude output to 4 million bpd by 2025.

The United States has urged this change for decades. But officials are being careful not to offend nationalist sentiment in Mexico: "The last thing a U.S. official ever wants to do is comment on energy reform in Mexico," Assistant Secretary of State for Western Hemisphere Affairs Roberta Jacobson told WLRN. "But obviously we believe opening up to investment an oil sector that needs some additional expertise to exploit its own resources is probably a good thing."

So why should Mexico’s change be Miami’s concern? Two reasons:

First, the reason everyone should care: Mexico’s oil growth could improve our economic growth.

It would most likely enhance Mexico’s economic growth too. But global oil supply and demand are at a post-recession crossroads. As economies like America’s rebound, so does their energy consumption. The Paris-based International Energy Agency (IEA) sees oil demand rising by 1.2 million bpd next year to more than 93 million bpd  – and the prices businesses and consumers pay will also rise, potentially stunting economic recovery, if supply doesn’t grow as well.

Supply should increase, especially as the United States becomes more energy self-sufficient and especially if Iran’s prodigious petro-output hits international markets again. If Mexico's oil production sees a significant upswing any time soon, that could further help stabilize global prices.

A VENEZUELA EFFECT?

Second, the reason South Florida should care: Mexico’s oil-industry reform could put reform pressure on Venezuela’s oil industry.

This effect might sound more wishful than the first, but some analysts say it’s worth considering. Venezuela’s own state-run oil monopoly, Petróleos de Venezuela, or PDVSA, was once the efficiently managed model of a nationalized petro-corporation. But under the socialist revolution that has ruled the country since 1999, poor investment and maintenance have pulled down PDVSA’s own output, which is well under 3 million bpd these days.

Venezuela has the world’s largest oil reserves, but it is now only the ninth-largest producer, according to the IEA. (Today, in fact, the Venezuelan revolution imports refined petroleum products from its arch foe, the U.S.) And because Venezuela relies so inordinately on oil revenue, PDVSA’s troubles are exacerbating the country’s current economic chaos.

Mexico is the world’s 10th largest producer. But if its oil reform passes and works – if it succeeds in attracting major private participation as Venezuela continues to drive it away – it’s bound to leapfrog Venezuela and cast the latter’s industry in a more embarrassing hemispheric light. That could perhaps prod Venezuela to makes its own changes – or even prod voters there to make a change to a more democratic and economically competent regime.

Peña Nieto noted last year that the public-private successes of oil industries like Colombia's and Brazil's were "models" that prodded him. As one Venezuelan economic analyst here in Miami told me this week, “Venezuela is no longer in the oil driver’s seat as it was during the glory days of [President Hugo] Chávez,” the firebrand socialist leader who died last March. “It’s the one who may have to start adapting now.”

Don’t hold your breath, of course, given how stubbornly ideological Chávez’s revolution remains. But then again, few thought Mexico’s stubborn oil nationalism would ever step out of its old clothes, either.

Tim Padgett is WLRN's Americas editor. You can read more of his coverage here.