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Why Mexico Needs an Energy Revolution

9:15 AM, Apr 12, 2013 • By JAIME DAREMBLUM
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Mexico’s problem isn’t a lack of proven oil reserves; according to the latest government estimate, it has nearly 13.9 billion barrels’ worth. For that matter, The Economist is right: “Mexico could be an energy superpower,” if only it would adopt the necessary reforms. Roughly half of its oil lies in deep-water areas, and Pemex is poorly equipped to extract it. That’s why Mexico desperately needs greater private investment by foreign multinationals. As energy expert Robert Bryce has written, “Excessive nationalism and fear of foreign investors have prevented the country from developing new oil fields, either on- or offshore. The result has been near-total reliance on a handful of fields.”

Meanwhile, the Mexican government has developed an unhealthy dependence on Pemex oil revenue, which accounts for up to 40 percent of the national budget. This means that Pemex is shouldering a heavy tax burden, in addition to an excessively large workforce. The bloated workforce is a consequence of collective-bargaining agreements signed with the might Pemex union. According to Thomson, the company has around 11,000 workers who collect salaries “without actually having any work to do.” Thus, Pemex reform should include a significant downsizing of the workforce, and it should be paired with broader tax reforms that broaden and diversify the Mexican government’s revenue base.

Needless to say, these reforms will be difficult to achieve. But the Pact for Mexico shows that all three of the country’s main political parties are willing to consider policy changes that would help boost Mexican oil production, and the ruling Institutional Revolutionary Party (known by its Spanish acronym, PRI) has formally revised its platform to remove the language opposing Pemex reform. On the other hand, Peña Nieto’s energy secretary has rejected the idea of privatizing Pemex.

If Mexican policymakers seize the moment and forge ahead with a bold plan for transforming the oil industry, their country truly could become an “Aztec tiger.” After all, for two years in a row, Mexico has grown faster than Brazil, and it has rapidly become a global manufacturing powerhouse (thanks in part to rising labor costs in China). Andrew Selee of the Wilson Center observes that Mexico’s average income “has more than doubled in real terms since 1997,” thereby reducing the U.S.-Mexican wage gap significantly. (Mexico’s average income is now comparable to that of Malaysia, Russia, and Turkey.) Between 2000 and 2010, some 17 percent of Mexicans entered the middle class, and inequality declined more in Mexico than it did in Brazil, according to the World Bank.

In other words, most of the economic news from Mexico is quite positive. But the country will never realize its full potential without overhauling its oil sector. The Mexican energy ministry believes that the reforms under discussion could boost annual GDP growth by up to 2 percentage points. Indeed, if Peña Nieto could seriously reform Pemex, it would be the ultimate “game changer” for the Mexican economy.

Jaime Daremblum, who served as Costa Rica’s ambassador to the United States from 1998 to 2004, is director of the Center for Latin American Studies at the Hudson Institute.

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