Academic journal article Current Politics and Economics of the United States, Canada and Mexico

Mexico's Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States *

Academic journal article Current Politics and Economics of the United States, Canada and Mexico

Mexico's Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States *

Article excerpt

INTRODUCTION

The United States has a strong economic interest in ensuring energy security, bolstering exports, and reducing barriers to U.S. trade and investment. The United States also has a national security and an economic interest in ensuring that Mexico, a key ally and top trade partner with which the United States shares a nearly 2,000 mile border, is economically vibrant and politically stable.1 U.S.-Mexico energy trade and cooperation plays an important role in achieving those goals. Energy cooperation has become a priority of bilateral economic cooperation under the U.S.- Mexico High Level Economic Dialogue as well as a focus of trilateral research, planning, and coordination among the energy secretaries of the United States, Canada, and Mexico.2

U.S. policy makers are closely monitoring the implementation of the December 2013 constitutional reforms and August 2014 implementing laws that, among other things, allow Mexico's Petroleos Mexicanos (Pemex) to partner with international companies and other industry entrants to boost Mexican production. Hailed by many analysts as the most significant economic reform undertaken by Mexico since its entrance into the North American Free Trade Agreement (NAFTA) in 1994, the energy reforms are expected to boost investment, growth, and eventually oil and gas production in the country. Investors appear to have maintained interest in Mexico's energy sector despite recent declines in oil prices.3

The reforms also opened Mexico's electricity sector to private generators, although not addressed in this report.4 If power sector reforms can help reduce Mexico's high electricity costs, then Mexico's manufacturing sector-a dynamic sector that is highly integrated with U.S. industry- should become more competitive.5 There is a danger, however, that the Mexican government may have oversold the benefits of the reforms to a populace that remains divided about whether or not they will be good for the country.6

This report provides an overview of Pemex and the content and prospects for Mexico's energy reforms, before discussing specific issues facing Mexico's oil and gas industry. It then examines the U.S.-Mexico energy relationship through the lenses of trade and energy cooperation. It concludes by suggesting several oversight issues for Congress related to what the enactment of energy reform might portend for Mexico's economic development, the U.S. energy matrix, and bilateral or North American energy cooperation.

PEMEX: A BRIEF HISTORY AND PRE-REFORM STATUS REPORT

Foreign investment in Mexico's oil industry has had a tumultuous history. 7 After oil was discovered in Mexico at the turn of the 20th century, foreign investors-primarily from Britain and the United States-played a significant role in helping the country become the world's second largest oil producer by the early 1920s. However, political unrest during and after Mexico's bloody revolution (1910-1920) and the country's 1917 constitution, which established national ownership of all hydrocarbons resources, caused investment in Mexico's oil and natural gas sectors to gradually decline. By the 1930s, reduced foreign investment had resulted in dramatic declines in production levels, and fraught relations between U.S. oil companies and successive post-revolutionary presidents had damaged U.S.-Mexican relations. Tensions culminated in President Lázaro Cárdenas' historic 1938 decision to abandon efforts to mediate a bitter labor dispute between Mexican oil workers and foreign companies and instead follow through on his threat to expropriate all U.S. and other foreign oil assets in Mexico.

Upon its creation in 1938, Pemex became a symbol of national pride and a rallying point around which Cárdenas and what became the Institutional Revolutionary Party (PRI)-the party of President Enrique Peña Nieto- united a disparate Mexican society against foreign intervention. Oil remains deeply tied to Mexican nationalism. …

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