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The energy industry plays an important role in the Mexican economy, and energy trade is a major component to the U.S.-Mexico relationship. Mexico is the third-largest foreign crude oil supplier to the United States, with exports currently averaging about 1.2 million barrels per day (b/d). The oil sector generates about 15 percent of Mexico’s export earnings. The importance of these exports in terms of net foreign exchange earnings is even greater, since much of the exports of manufactured goods are heavily dependent on imported inputs. However, for several years, budget limitations have translated into inadequate investment in the oil and gas industry in Mexico, with a resulting decline in production.
The Mexican government relies on the oil industry for 40 percent of total government revenues, including taxes and direct payments from Petróleos Mexicanos (Pemex), the state oil company. The oil, gas and electricity industries currently account for around 3 percent of Mexican gross national product. In addition, Pemex is a major employer with a workforce of more than 139,000. The electricity sector employs another 109,000 people, implying that the energy sector as a whole accounted for about 1.7 percent of the total Mexican workforce. The Mexican Energy Regulatory Commission (CRE) also observed that, in 2000, the energy sector supplied more than one-third of total public revenues while requiring more than 50 percent of the total public sector investment budget.
Mexico’s energy sector faces serious challenges. Oil production has fallen from 3.5 million b/d in 2007 to 3.19 million b/d currently and is expected to decline further in the coming years. Rising energy consumption inside Mexico has also constrained the country’s ability to export, with crude oil shipments to the United States 300,000 b/d lower than five years ago. Moreover, Mexico’s imports of gasoline and other products from the United States have been on the rise. Without significant energy sector reforms and investment, Mexico could become a net oil importer in the coming decade, with dire economic consequences for the country and important implications for U.S. energy security. President Calderon tapped the political opportunities created by the global financial crisis to push for energy sector reform in Mexico to free up some of Pemex’s financial resources for long-term investment, but more reforms will be needed for Mexico to reverse its current path of energy production decline and increasing importer status.
The next presidential election cycle will have important implications for the future of Mexico’s energy sector, with important ramifications for cross-border energy trade, environmental quality at border regions, and economic development and related immigration flow. Mexican energy policy will have far reaching consequences for U.S.-Mexico relations and for U.S.-Mexico border regions. Understanding the dynamics of the political trends in Mexico that will impact future energy policy and the economic consequences of such policies requires a multidisciplinary approach that will study underlying issues from many perspectives. The aim of this study is to promote a better understanding of the challenges facing Mexico’s oil sector and to enhance the debate among policymakers, the media and industry on these important issues.
The study will consist of several academic working papers and a policy white paper to be published in both Spanish and English. The policy paper will be published as a joint Baker Institute/Oxford University publication. The Baker Institute Energy Forum will publish the study in its entirety, including all of the faculty working papers, on its website. Participating scholars will include scholars from the Baker Institute, Oxford University, and Mexican universities and think tanks.
Two internal meetings for commissioned researchers to exchange ideas and discuss the content of working papers are planned: one at the Baker Institute in Houston and one at Oxford University. Two capstone conferences will also be planned to present the study to policymakers and the public: first, in Mexico City, and then a longer conference with a wider range of speakers at the Baker Institute.
The academic working papers will be divided into four subject areas:
1) The Politics of Resource Nationalism
2) Economic and Oil Revenue Distribution Issues for Mexico
3) The Mexican Oil Industry
4) Oil in the U.S. - Mexico Relationship
Proposed Working Papers
SECTION ONE: The Politics of Resource Nationalism
Oil Policy Reform in Resource Nationalist States: Lessons for Mexico
David Mares, Baker Institute/UCSD — This paper puts the Mexican oil reform issues into the context of the trend in the politics of natural resources reform in Mexico, compared to other large resource holders in Latin America.
Stuck in the Mud: The Politics of Constitutional Reform in the Oil Sector in Mexico
Carlos Elizondo Mayer-Serra, Centro de Investigación y Docencia Económicas (CIDE) — This paper considers the constitutional issues and how they might be superseded in constructing a reform of Mexico’s oil sector to encourage technology transfer, to finance new upstream investment and possibly invite foreign investment in Mexico’s sector.
SECTION TWO: Economic and Oil Revenue Distribution Issues for Mexico
Scenarios for Oil Supply, Demand and Net Exports for Mexico
Kenneth B. Medlock III and Ronald Soligo, Baker Institute — This paper models and forecasts future oil demand trends in Mexico under different scenarios and provide analysis of when and whether the country might become a net oil importer.
"El petróleo es nuestro": The Distribution of Oil Revenues in Mexico
Paul Segal, University of Sussex — This paper provides an overview of how oil rents are currently distributed into the Mexican economy and study the political economy for creating a new more equitable system to redistribute oil rents in Mexico across a broader spectrum of the population. One concept to be investigated is a national system of dividing oil revenue per person and distributing royalties to citizens - similar to the system in place in the state of Alaska - or through the creation of different distribution vehicles than the current system for distribution of oil revenues. The paper will consider how distributional effects impact political support for reform of Mexico’s oil sector.
The Macroeconomic Consequences of Falling Oil Revenues in Mexico: A Looming Crisis or a Mixed Blessing?
Jaime Ros, Mexico's National University (UNAM) — This paper investigates the fiscal and economic impacts on the domestic economy of Mexico and its international debt under various scenarios, including scenarios projecting that Mexico becomes a net importer of oil. How will various outcomes in oil influence the Mexican government’s fiscal situation and Mexico’s economic standing internationally?
Coping with Adversity in the Mexican Oil Industry: Como Pemex no hay dos
Laurence Whitehead, Nuffield College, Oxford University — This paper explains the adverse conditions in the Mexican oil industry with a focus on geological difficulties and rising economic costs.
SECTION THREE: The Mexican Oil Industry
Beyond Efficiency: The Politics of Investment Policies in the Oil Industry
Carlos Dominguez, Instituto Mora — This paper provides a case study regarding how investment dollars are distributed in Mexico’s oil industry. In particular, the study will investigate why refining infrastructure is easier to fund than oil field exploration and development, and how that impacts Mexico’s future.
The Revenue Efficiency of Pemex: A Comparative Approach
Peter Hartley and Kenneth B. Medlock III, Baker Institute — This paper discusses Pemex’s performance as a commercial enterprise in comparison to other NOCs and to large IOCs, with an eye to analyzing its technical efficiency and pathways for improvement.
Oil and Gas in Mexico: Geology, Production Rates and Reserves
Manik Talwani, Rice University — This paper provides an overview of the geological properties and prospects for oil fields in Mexico.
Taming the Beast Within: The Mexican Energy Regulatory Commission
Cristopher Ballinas Valdés, Instituto Technológico Autónomo de México (ITAM) — This paper covers the institutional and political dimension in forging autonomous agencies in Mexico, including regulatory reform and independent oversight. Case studies of agencies such as the Energy Regulatory Commission (CRE) will be included to show how particular agencies can be “captured” by political interests.
SECTION FOUR: Oil in the U.S.-Mexico Relationship
Energy Trade and Security Issues at the U.S.-Mexico Border
Isidro Morales, Tecnológico de Monterrey — This paper studies cross border energy trade and smuggling, as well as its implications for the U.S.-Mexico border and border relations and the broader U.S.-Mexico relationship.
The Energy Factor in Mexico-United States Relations
Isidro Morales, Tecnológico de Monterrey — This paper analyzes the impact of energy on the U.S.-Mexican relationship.
Oil and U.S.-Mexico Bilateral Relations
Joe Barnes, Baker Institute — This paper considers U.S.-Mexico energy border issues and oil matters and how they impact U.S. foreign policy toward Mexico, as well as the overall U.S.-Mexico relationship.
The joint policy white paper will cover highlights and findings from the working papers of the study and will be drafted by Amy Myers Jaffe and Laurence Whitehead.