The weight of energy in the political transition in Mexico: moving backward to the future

Mexico - Feb 25 2019

The weight of energy in the political transition in Mexico: moving backward to the future

The July 1 federal election in Mexico brought Andrés Manuel López Obrador to power in what is, for the majority of observers, a surprise. Admittedly, this result contrasts with the trend of recent struggling leftist movements in Latin America, Venezuela, Brazil, Ecuador and Argentina. But a country and sovereign risk analysis framework requires a long historical perspective and the identification of top-notch themes that are hardly visible in the daily information flow.

As early as 1917, Mexico had promulgated the Constitution affirming the inalienable rights of the State on its subsoil. Mexico then underwent a phase of chronic instability from the revolutionary period, fed by changing political forces, but also English and American interferences, with each of the two powers working to support their favorite politicians (Huerta for the former, Carranza for the latter). Twenty years of reversals at the head of power finally led President Cárdenas to devote the inalienable right of the people on petroleum resources in the Constitution and establish the national company PEMEX’s monopoly on the oil sector in 1938. One shouldn’t underestimate the symbolic significance of the agreement signed in February 2012 between Mexico and the United States regarding the exploitation of resources on their shared border. Then President Calderon had welcomed this agreement as a sign of appeasement of a historic mistrust between the two countries: “I will say this with great candor. We are setting aside the old fear that honestly exists among many Mexicans that Mexico's oil could be extracted unilaterally from the other side of the border.” His words on this occasion expressed all the crispation of a people of Latin heritage faced with the Anglo-American influence perceived as predatory. Mexican oil had been excluded from the world market following the 1938 nationalization, a retaliation organized by England and the United States, and more than seventy years of autonomous or even autarkical oil development, had been necessary for Mexican authorities to consider possible a relationship on equal footing with their northern neighbors.

But a 2013 survey of the Center for Economic Research and Education (CIDE) indicated that 65% of Mexicans rejected private participation in the energy sector. From this date, the agreement known as the "Pact for Mexico" between the three main political parties - Party of the Democratic Revolution (PRD), Institutional Revolutionary Party (PRI) and National Action Party (PAN) - to vote the reforms appeared threatened, the PRD opposing the "privatization of oil". Despite a long political career and his failure in the 2012 election, Andrés Manuel López Obrador represented the resistance that the majority of the people and part of the Mexican political class had shown towards the 2012 agreement and the energy sector reform project led by President Enrique Peña Nieto, President Calderon's successor. His overwhelming victory in the 2018 election (30 points ahead for the winner while the differences were only 6, less than 1 and 7 points respectively in the elections of 2000, 2006 and 2012) confirms that the question of the opening of the State monopoly on oil in Mexico, emblem of national sovereignty since the expropriation in 1938 of foreign companies, is not simply an economic reform of a technical nature, but one that touches on the very definition of the people and the sovereignty of the country. Energy makes the system and the system makes society.

The potential implications of this election are profound and go beyond the scope of this Insight. We can nevertheless mention three axes. First and foremost, for Mexico, which must redefine its relationship with the United States, regardless of the brutal nature of the Trump Administration's policy. Second, for the international oil industry which, because of the worldwide scarcity of the potential for discovering new reserves, has rushed to the recent allocations by the Mexican authorities of exploration licenses, particularly in the offshore domain. While the fundamentals of the oil market gradually reveal new structural tensions and the price of oil resumes an upward trend, the balance of power seems to shift again in favor of the States against the international companies. In this respect, the weakening suffered by Mexico from the contraction of its oil domestic production for more than a decade, as a result of the depletion of its main giant Cantarell field, does not appear to be irreversible. Finally, for Latin America. As demonstrated by the Trump administration’s recent pressure on Saudi Arabia to lower the price of oil, energy remains a lever of instrumentalization of the first order and, whatever the International Energy Agency may say about it., US interventionism on the international scene is not receding. The Mexican election is part of a long struggle against the Monroe Doctrine which it is very premature to consider as obsolete.

Olivier Rech, Head of Energy-Climate Research

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