What is the Immediate Impact of Mexico’s Energy Policy Overhaul?

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Explore:  Energy Reform Mexico

By the end of 2013, Mexico’s Congress approved a bill to change Mexico’s energy policy and end a state oil monopoly that lasted 75 years. Despite protests from opposition lawmakers, the bill secured the necessary votes and will be implemented before the end of 2014.

With many laws and regulations expected to improve the efficiency of the energy sector, major changes are predicted in Petroleos Mexicanos (PEMEX).  Allowing private contracts and partnerships between the state oil producer and other companies, the bill will also set parameters for PEMEX’s ability to compete and create partnerships. That way, PEMEX would have more autonomy, a competitive tax regime, and a board that promotes the best international practices.

Chief Executive of Pemex Emilio Lozoya commented, “[The energy reforms bill] will only strengthen Pemex because it would allow us to have much more flexibility in the way we exercise our portfolio and in the way we can partner with various players and various parts of our supply chain.” Despite the government investing $20 billion a year on the oil industry, PEMEX had failed to operate up to its potential, reducing the output from 3.4 million barrels a day to 2.5 million.

Two challenges stand in the face of restructuring PEMEX: the unions and the government. Both have their interests at stake and could resist the change and end up slowing down or fully blocking the reforms. However, if PEMEX decides to comply and adapt, it may reach the same success as its Brazilian counterpart Petrobras. After several reforms from the mid 1990s to the 2000s, the national oil company of Brazil has made a name for itself worldwide and now owns modern R&D labs that boast both efficiency and high technology.

PEMEX aside, the gasoline industry will react to Mexico’s latest energy reforms. Currently, gasoline is heavily subsidized in the country, which is why it is sold for far less than its cost of production. Once the reforms are implemented, these high subsidies will be eliminated. Gustavo Madera, president of Mexico’s National Action Party, deems them useless because they don’t serve their true purpose. “The rationale behind these subsidies has always been that they are helping the poor, but the truth is that they are supporting those who already have money — the middle class and upper class. Because of these kinds of subsidies, there isn’t the money to help the poor.”

Another industry that will feel the impact of the upcoming changes is the electricity market. Like the oil industry, it will be opened to the private sector for the first time. This is why Mexican officials are planning to separate the transmission of electricity from generation. Though the separation process will be difficult and time consuming, especially with the high number of private investors in these fields, Mexico is determined to carry out this process.

The economy of Mexico will also be affected by the reforms, but in a positive way. With the country attracting as much as $1.2 trillion in investments and its manufacturing and industrial sectors thriving, 2013 witnessed a 0.8% growth in the fourth quarter and an overall estimated growth of 1.3% for the whole year. Though it was lower than the 2012 prediction of 3.8%, the estimate indicates the country’s growth potential. With more jobs opening up, poverty rates will decrease while living standards will improve.