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Opinion: Mexico’s Next President Must Have a Plan to Protect Oil, the Nation’s Greatest Asset

This article was originally published here by the San Diego Union-Tribune.

Mexico elects a new president and Congress on Sunday. Current polling shows ruling party candidate Claudia Sheinbaum holding a substantial lead over her center-right rival, Xóchitl Gálvez; whoever wins will become the country’s first woman head of state. She will face major challenges in the energy sector that will be determinative to her success, with the national oil company in crisis and serious weaknesses in the electricity system that will harm efforts to attract investment.

Prior to the 2012 election, we identified major energy challenges for the next administration. Sadly, many of those same challenges exist today. Mexico’s oil production continues to fall, oil exports have collapsed, while natural gas and refined product imports from the United States have soared over the same period. Despite a promising energy reform in 2013, the electricity sector continues to languish with underinvestment in both generation and transmission; as a result, blackouts are becoming much more common. And so, the Mexico energy story remains much the same: the cast of characters has changed, but the script is instantly recognizable. In the same way that violence and crime are still existential issues for the country, corruption is endemic, and poverty and inequality are a chronic curse, energy policy remains mired in a vision of the past that will hinder efforts to advance both prosperity and certainty.

But there is hope. Thanks to shifts in geopolitics, strategic competition with China, its proximity to and integration with the United States, Mexico stands to benefit from nearshoring investment. Mexico will only be able to reap the full rewards of nearshoring, however, if the next president can guarantee a reliable energy supply, especially when it comes to clean energy.

The outgoing administration has severely curtailed the opportunities for private investment in renewables generation and transmission, as well as trying to concentrate control over energy in the hands of the state-owned enterprises, Pemex and the electricity utility, CFE. The new administration should quickly move to ensure that the nearshoring wave and opportunity is fully seized, and that means developing a more coherent and resilient energy policy.

The lack of reliable and clean energy alternatives is a potential deal-breaker for potential nearshoring companies. Both candidates have talked of the need to boost renewables generation, but unless a new regulatory and permitting approach is embraced, it is unlikely that investors will rush to build new capacity and transmission lines.

Oil production in Mexico in 2024 is less than half what it was in 2004. This is despite the massive budgetary allocation the Lopez Obrador administration has injected into the national oil company.

Most alarming, however, is the intransigence of Pemex as the world’s most indebted company. As oil production has spiraled down, debt has soared: By May of this year, Pemex debt stood at $101.5 billion. Even more worrying is overall liabilities: By last year, they had increased to $233.4 billion. A tremendous amount of ink has been spilled analyzing how and why Pemex has reached this point. Simply put, Pemex is sclerotic and corrupt, and its capital expenditure has been wasted on white elephant projects such as a shamefully expensive new refinery. The next president must adopt a heavy dose of pragmatism when it comes to the oil sector.

The focus on oil production and the new refinery must be replaced with considerations of efficiency and profitability. Mexico needs a smaller, leaner and more transparent Pemex, one that can produce energy and benefit for the nation. It also needs more players in the oil sector, so a renewed focus on partnering with the private sector would be most welcome. Lastly, Pemex operations are an ecological catastrophe; natural gas flaring and venting are major contributors to climate change and Pemex must be forced to implement its own goals of cutting emissions by 54 percent over the next six years.

We are not arguing for any new laws or major constitutional reforms; the legal framework exists for the energy sector to succeed. Rather, we urge the new government to simply develop and implement a more rational and coherent strategic vision. Mexico’s next president will best serve the nation if she rapidly and effectively confronts these fundamental challenges.

If not, in six or 12 years we may need to revisit this tragic wasted opportunity.

Mexico Institute

The Mexico Institute seeks to improve understanding, communication, and cooperation between Mexico and the United States by promoting original research, encouraging public discussion, and proposing policy options for enhancing the bilateral relationship. A binational Advisory Board, chaired by Luis Téllez and Earl Anthony Wayne, oversees the work of the Mexico Institute.   Read more