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Why Mexico Needs an Energy Revolution

9:15 AM, Apr 12, 2013 • By JAIME DAREMBLUM
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The day after his inauguration on December 1, Mexican president Enrique Peña Nieto joined with leaders of the country’s two main opposition parties to sign the “Pact for Mexico,” a joint pledge to pursue dozens of domestic reforms in areas such as education, telecommunications, and energy. At the time, it was unclear how soon the most controversial reforms would be adopted, or whether they would be adopted at all. Mexico had suffered from years of legislative gridlock, and powerful interest groups were determined to protect their turf. Did the Pact for Mexico represent a historic breakthrough? Or was it mostly a symbolic gesture?


Thus far, it seems that the agreement really was a breakthrough. On February 25, Peña Nieto approved the most ambitious Mexican education reform in several decades, a reform that will hopefully raise standards for teachers and make their promotions contingent on classroom performance. (A day after the education reform became law, the leader of Mexico’s most powerful teachers’ union—a woman long suspected of massive corruption but also considered politically untouchable—was arrested and accused of embezzling more than $200 million.) On March 21, the lower house of the Mexican congress passed a telecom reform that will promote greater competition and make it easier for the government to crack down on monopolistic practices. The telecom reform is now being considered by the Mexican senate, and is expected to win approval sometime this month.

Not surprisingly, foreign observers have praised Mexican officials for rising above partisan politics and working together to address longstanding problems. In a recent editorial, the Christian Science Monitor hailed the Pact for Mexico and the country’s subsequent reform spree as a model for U.S. lawmakers on Capitol Hill. Depending on how the education reform is implemented, it could dramatically boost the quality of Mexican schools, and thus the achievement levels of Mexican students. And the telecom reform will almost certainly make the Mexican economy more competitive.

But the biggest challenge for Mexican reformers lies ahead. I am referring to Pemex, the 75-year-old state oil monopoly, which represents the most notable “third rail” issue in Mexican politics. Since its creation in the 1930s, Pemex has been a prominent symbol of both Mexican nationalism and Mexican corporatism. Its iconic status has prevented multiple generations of presidents and lawmakers from doing what is necessary to make the Mexican oil industry more productive.

As a result, writes Financial Times correspondent Adam Thomson, Pemex has become notorious for “inefficiency, corruption, and, above all, monumental losses.” (An explosion at its headquarters on January 31 left 37 people dead.) Last year, for example, the company reported approximately $130 billion worth of sales; and yet, “only exploration and production, one of its four subsidiaries, regularly turns a profit.” In 2012, the three other Pemex subsidiaries “racked up a combined net loss of 111.6 billion pesos—about the same as the entire government budget of Bolivia.”

The company is now carrying more than $51 billion in net debt, and its oil production has declined every year since 2004, dropping from a peak of 3.4 million barrels per day to fewer than 2.6 million. In fact, Mexico could conceivably become an oil importer sometime within the next decade; the U.S. Energy Information Administration believes it could happen by 2020.

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