Andres Oppenheimer

Andres Oppenheimer: Mexico’s big oil reform gamble

Mexico’s historic energy rules passed into law earlier this week were hailed by President Enrique Peña Nieto as the beginning of a new era of prosperity, but — if they fail to produce quick results — they could also lead to an equally historic leftist victory in the 2018 elections.

In other words, this may be Mexico’s last chance in a long time to take off as a modern, democratic, free market success story.

Peña Nieto’s new reforms allowing private companies to invest in energy for the first time since the 1938 nationalization of the oil industry will have to start drawing huge foreign investments soon, in order to prevent a political backlash that could put an end to several decades of pro-free market presidents.

This is because Mexico has had a succession of technocratic presidents in recent decades who have promised to bring about prosperity through free market reforms, but who have failed to raise the country’s mediocre growth rates. If Mexico continues growing at a snail’s pace, voters will turn to the left, several well-informed Mexicans tell me.

In his speech earlier this week announcing the new laws, Peña Nieto said that energy reform “will speed up economic growth and Mexico’s development over the next few years.” He added, “We have overcome decades of immobility.”

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Many private economists agree.

“The energy reform’s economic impact will be spectacular,” Gabriel Casillas Olivera, chief economic analyst of the Banorte banking group told me this week. “We haven’t seen anything like this before. There have been many economic reforms in Mexico, but this is THE economic reform.”

According to Banorte’s projections, the energy reform will draw $7 billion in new investments in 2015, $12 billion in 2016, $20 billion in 2017, $29 billion in 2018, $40 billion in 2019, and $50 billion in 2020.

This will help raise Mexico’s economic growth from 2.7 percent this year to 5 percent in 2015, 4.5 percent in 2016, and 5.5 percent in 2017, according to the group’s projections, which Casillas Olivera says are “conservative figures.”

The International Monetary Fund is projecting that Mexico’s economy will grow 2.4 percent this year, and 3.5 percent in 2015.

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There are several risks, however. First, there is the “geological” risk that Mexico’s shale oil and liquid oil reserves may not be as easy to exploit as originally expected, which could discourage some potential investors.

Second, there is a risk that Mexico’s drug violence may scare away energy investors. While big oil companies such as Exxon or Chevron are used to working in dangerous areas around the world, smaller companies such as Texas-based shale gas firms that are expected to flood into Mexico’s shale gas industry are not.

Some of Mexico’s biggest shale gas reserves happen to be in the area encompassing the states of Tamaulipas, San Luis Potosi and Veracruz, one of Mexico’s regions most affected by drug cartel violence.

Third, there is a “political” risk that leftist parties may call a referendum to overturn the energy reforms, which they are unlikely to achieve, or — more likely — that the Peña Nieto government may water down the implementation of its energy reforms to avoid larger street protests.

For the time being, Mexicans seem to be on a wait and see mode. While according to an Aug. 6 poll by the daily Reforma the ruling Institutional Revolutionary Party would win the 2015 legislative elections with 40 percent of the vote if the elections were held today, and Mexico’s leftist parties would only get 23 percent of the vote, a sizable 40 percent of Mexicans disapprove of the energy reforms. What’s more, 61 percent fear they will increase electricity and gas bills.

Opposition to the energy reforms will become leftist parties’ biggest rallying cry over the next three years.

The new laws represent “the biggest political regression that our country has suffered in more than a century,” wrote leftist Senator Alejandro Encinas in the daily El Universal this week. “They have imposed a conservative credo and an economic model that has led to the misery of a majority of Mexicans.”

My opinion: The reform of Mexico’s corrupt and decrepit state-run oil industry was long overdue, and some leftist politicians’ opposition to private sector investments that are even sought by communist China and Cuba is a measure of how outdated they are. But if Peña Nieto doesn’t get the billions in foreign investments that are expected, and soon, such outdated rhetoric will become increasingly appealing to millions of Mexicans.

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