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Energy reform is a potential boon to manufacturers in Mexico

by tecma

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some_textIn Mexico, schoolchildren are taught to take pride in the state’s ownership of the oil industry, celebrating “Día de la Expropiación Petrolera” on March 18, the day the oil industry was nationalized in 1938. For 75 years, Mexico’s sole oil and gas company, Pemex, has held a state monopoly in this crucial industry, leaving the country with high energy prices and a wariness for foreign involvement in energy resources.  In fact, Mexico’s constitution expressly forbids private companies from owning Mexican oil. Any changes made in the industry in the future is a potential gain in competitiveness for manufacturers in Mexico.

Change may be on the horizon. This month, the Mexican government announced plans to reform the structure of its energy industry, stopping just short of privatization. Details are still being debated, but it appears that Mexico will soon offer foreign energy companies options to partner with the Mexican government in profit and risk sharing, thus allowing for a dramatic shift in Mexico’s economy some are comparing to the transformation that occurred with the signing of NAFTA.  An increase in the production of energy and/or a lowering of prices will, undoubtedly, make manufacturers in Mexico more competitive.

The three primary reforms that are being considered include: allowing private companies to explore and extract resources at will with “concessions,” granting private companies production sharing privileges (giving them a portion of oil produced), and allowing them risk-sharing contracts (giving them a share of the profits from resource sales).

Foreign Direct Investment stands to increase dramatically if such reforms are implemented.  Net annual investments have averaged $20 billion over the last five years.  Oil, gas, and power have only received $360 million in the same time period. Economist Nader Nazmi estimates that the ratio of investment to GDP could rise by an additional 2 percentage points from the effects that energy sector reforms could have on public and private investment.  An increased energy supply could bolster investment in factories and manufacturers in Mexico, due to the reduced fuel costs producers would face. Some say FDI could hit $50 billion in just the next decade.

While a half-hearted effort could wreck expectations and hurt future growth, the push to reform Mexico’s energy sector has the potential to increase the country’s economic growth by 2%.  In addition to the attractiveness of their low labor costs, Mexico’s dramatically reduced fuel costs could position the country as one of the most cost-effective locations for manufacturing and other business that are energy intensive in nature.  As stated by one of the primary architects of the reform proposal, Finance Minister Luis Videgaray, “We have a great opportunity to improve the economy, to generate more jobs and to generate competitiveness for Mexican industry through the energy reform.”

Mexico may soon swing open the door to such competition. There are high hopes that economic growth and a new era of energy independence and stability will follow close behind.

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