BUSINESS

Mexico’s energy crisis has arrived

Our NAFTA partner is running out of oil, and that’s trouble for Canada

ANNETTE HESTER November 13 2006
BUSINESS

Mexico’s energy crisis has arrived

Our NAFTA partner is running out of oil, and that’s trouble for Canada

ANNETTE HESTER November 13 2006

Mexico’s energy crisis has arrived

BUSINESS

Our NAFTA partner is running out of oil, and that’s trouble for Canada

ANNETTE HESTER

Mexican presidentelect Felipe Calderón was in Canada last week to meet his NAFTA counterpart, talking trade and co-operation. Behind the smiles and warm words, however, there are serious questions brewing about just how Mexico will deal with a burgeoning energy crisis. Simply put, Mexico is running out of oil, and that could put extraordinary pressure on Canada and upset the global energy scene.

Canada and Mexico are the top two suppliers of oil to the U.S., with exports of 2.1 million and 1.8 million barrels a day respectively, but the two countries are worlds apart in the development of their energy resources. Canada has fostered development of its reserves, and is about to increase its production substantially. Mexico, on the other hand, has the potential to be an energy powerhouse, but has allowed oil and gas exploration and production to be hamstrung by history and outdated national economic policies.

Early in the last century, the Mexican government enshrined national ownership of all hydrocarbon resources into its constitution, and in 1938 nationalized the industry with the establishment of state oil company PEMEX. The government of the day asked all Mexicans to help pay the costs of expropriating oil properties from foreign corporations. Families parted with treasured heirlooms to help government pay the expropriation costs. As a result, there is still a deeply

emotional public attachment to the national company, which limits the ability of government to change the constitution to permit private investment. Any such change would require approval by a prohibitive two-thirds majority vote in the federal legislature as well as a majority of the state legislatures.

For decades, PEMEX did well for the country, managing to explore, produce, invest and pay taxes. Its conventional reserves grew to the point that Mexico ranked third in the western hemisphere, after Venezuela and the U.S. (Canada now ranks first, thanks to the Alberta oil sands). Oil prices rose, production increased, and the Mexican government became addicted to PEMEX’s revenues. Instead of relying on taxation to finance expenditures, like most developed countries, the government took what it needed from PEMEX. The federal purse now takes more than 60 per cent of company revenues, which provide a third of the national budget. In spite of record high oil prices, PEMEX has run up massive debt and recently posted a net loss of US$7 billion for 2005-

The company is starved for investment funds to improve production in mature fields, such as the mammoth Cantarell—where current production of almost two million barrels per day is projected to fall by 30 per cent in the next two years—and to develop new

discoveries such as the potentially vital Chicontepec field. As things stand currently, Mexico only has 10 years of oil reserves left.

The story on natural gas is even worse. Mexico’s reserves have declined from 56.1 trillion cubic feet in 1999 to 48.6 trillion in 2005. Although PEMEX has managed to increase production slightly in the last three years, consumption has considerably outpaced domestic supply, forcing the country to become a net importer from the U.S. This trend is expected to continue.

The severe shortfall of investment funds has also impacted the refining sector. In spite of its considerable oil production and exports, Mexico is a net importer of refined petroleum products, especially of gasoline. Problems are already beginning to surface. Mexico has seen its regional influence wane as Venezuela takes a greater role in subsidizing oil for Caribbean and Central American countries, and the impact on North America won’t be far behind.

Canada is already producing and exporting all it can, and is planning to increase production apace. Even so, it won’t be able to make up the shortfall caused by Mexico’s export decline. The U.S. will need to look for other suppliers, most likely in the Middle East, and oil prices will surely rise. The result will be a heightened feeling of insecurity accompanied by the usual protectionism and calls for heavy subsidies for domestic American production. Extremely high oil prices will put a great deal of pressure on the Ontario economy and fuel hyperactivity in Alberta, exacerbating the already serious labour shortages and increasing costs to unsustainable levels. It is a recipe for hemispheric trouble.

Adding to this uncertainty is the fact that Mexico has opted out of NAFTA on key issues related to oil and gas. However, the country is part of the tripartite energy working group, which might be helpful. But with nationalistic emotions running high in Mexico, even subtle pressures from the partners might be construed as attempts to interfere. President Calderón has his work cut out for him. The PEMEX golden goose is nearly exhausted. And when the oil runs out, what happens to Mexico? And what happens to the rest of us? M

Annette Hester is a fellow with the Centre for International Governance Innovation in Waterloo, Ont., specializing in the geopolitics of energy in the western hemisphere.