For more than 75 years, Mexico has placed complete control of its oil industry under Petróleos Mexicanos (Pemex). With its name boldly branded on every gas station in the country, this state-run oil giant has served as a major source of revenue for the Mexican economy and is a symbol of Mexican national pride. Within the next few years, however, this may all change. With new neoliberal reforms soon to take effect, Pemex may lose its glorified status. Yet, these reforms should be met with optimism, since they may aid the Mexican economy in witnessing positive gains.
Now more than ever may be the time that these reforms are needed. Pemex’s nearly million-barrel decline in oil production over the past decade has proven that it is no longer the powerhouse it used to be. This is a serious issue for the Mexican economy as a whole, considering that 34 percent of Mexico’s national budget is attributed to revenue from Pemex. These startling statistics have forced President Enrique Peña Nieto to push for the reformation of policies governing the oil industry. Under current policy, Pemex is at a loss to expand its production, so it must pursue joint ventures with private companies, both domestically and internationally. Other companies will now be able to bring in the technology and strategies needed to tap into the deep-water areas and shale gas sources, which Pemex is currently incapable of independently pursuing.
Consensus in Neoliberalism
Alongside other concerns, the fear of losing such a substantial portion of the national budget in upcoming years has led Mexican officials from all major parties—including the ideologically centered PRI, the conservative PAN, and the liberal PRD—to come together in a rare pact. Despite the three parties’ very different political outlooks, the Pact for Mexico was established following President Nieto’s election in December 2012 as the parties realized that neoliberal reforms in the oil sector and elsewhere were necessary. A year later, following the passing of several reforms in various sectors, including education and telecommunications, the Mexican Congress passed the first of two bills allowing for profit-sharing contracts and foreign investments in the oil sector. The bill allows the Secretary of Energy to issue licenses for downstream activities to private institutions. These sectors include refineries, pipelines, petrochemicals, transport, and even the management of gas stations. The bill still leaves Pemex with some monopolistic power, however, as the Secretary of Energy cannot grant licenses or production-sharing contracts for the exploration and extraction of oil and gas. The second bill, which concerns the implementation of the reforms, was signed into effect on August 12 and creates the regulatory bodies necessary to allow foreign investment in the oil sector.
The liberalization of the Mexican oil industry has several key implications. First, the opening up of the oil industry will no doubt decrease the role Pemex plays in contributing to the nation’s revenue intake. With outside groups taking over a portion of oil production, Pemex will naturally lose some of its market share. This, in turn, will reduce Pemex’s status as a symbol of national pride, a key value instilled in all Mexicans at young age. Gustavo Flores-Macías of Cornell University explains to the HPR that in the Mexican education system, “the official textbooks ingrain the notion in kids that oil belongs to all Mexicans and that General Cárdenas was one of the early modern Mexican heroes of the 20th century. Therefore, it is something we should all defend as something that is ours. It was [seen as] the Mexican government standing up against foreign interests.”
Flores-Macías also notes that polls showed that “people generally thought some reform was needed. But they didn’t necessarily think that opening up the industry to foreign investment was the ideal reform … There seems to be a disconnect between what the general public thought should be done and what ended up happening.” However, swallowing a little pride may help the people of Mexico and their economy in the long run. In fact, according to some projections, private investment in Mexico’s oil industry may boost GDP by an entire percentage point. Furthermore, these policies would be a major step forward in cultivating international cooperation since the passage of NAFTA, and they would prove favorable to international partners. For example, the U.S. economy would benefit, as U.S. companies would now be able to enter Mexican waters and aid in the drilling process. The United States’ superior technology and expertise in oil drilling would create profits for both countries. Thus, it seems as if these reforms will result in a win-win situation for both Mexico and its international partners.
A Model for the Future, or a Model of the Past?
Mexico’s new neoliberal policies reflect what may be a continuation of a larger movement across Latin American countries. In fact, since the 1980s, many Latin American countries have implemented neoliberal reforms following debt crises. Coincidentally enough, many of these debt crises were exacerbated by increases in oil prices, which forced countries to borrow heavily. The neoliberal reforms that followed helped many Latin American economies escape their debt crises, but these reforms also sometimes proved detrimental to the citizens of the countries. The deterioration of state-run entities caused unemployment to rise. Furthermore, the losses in state revenue that ensued caused a decline in public services and the removal of many subsidies. Thus, while the overall financial statuses of countries improved following neoliberal reforms, individual citizens frequently suffered in the short run. In fact, it is these damaging results that have made some leaders wary to pursue neoliberal policies and have even led some to say that neoliberalism is dying in Latin America.
With the nationalization of the oil industry in 1938 under President Lázaro Cárdenas, a strong Mexican government was established that lasted for decades. During the 1980s, as in other Latin American countries, Mexico began to adopt neoliberal reforms. However, what is unique about Mexico in relation to its neighbors, explains Professor Steven Samford of the Munk School of International Affairs at the University of Toronto in an interview with the HPR, is that Mexico “more or less unwaveringly maintained this economic orientation. In the last ten or fifteen years in the rest of Latin America there has been a movement towards undoing or softening the reforms from the 80s and 90s.” Even so, because of the large economic and symbolic role the oil sector plays in Mexico, reforms in this sector have proven more difficult to pass.
In fact, no president has been successful in passing an oil reformation bill comparable to those under current consideration since the nationalization of the industry. Even these current reforms proved controversial enough to cause the left-leaning PRD to leave the Pact for Mexico. Indeed, the contentiousness of oil sector reform is the reason why energy reform was placed as one of the final objectives in the Pact for Mexico. As Jorge Domínguez, Professor of Mexican Studies at Harvard University states to the HPR, President Nieto’s thought process was something along the lines of “Let’s move first on things all three parties agree and then when we get to the end of my first year of my six year term then I know I have to break it up.” Because he placed less drastic reforms first on the agenda, President Nieto was able to pass a series of neoliberal reforms in several sectors rather than just the more divisive bills concerning oil.
If the past serves as a guide to the future, then there is reason to be wary of the new laws governing oil policy. However, if the entire scope of the current situation at hand is taken into account, then these new oil policies should be met with optimism. Mexicans’ fear of losing their jobs to international partners can be quelled by the fact that without these partnerships certain oil drilling projects would never even exist. Furthermore, provisions in the bill call for at least 25 percent of the labor and material in these projects to come from domestic sources initially, and the law would raise this percentage significantly over the next decade. Thus, employment could actually rise because of these new partnerships. Furthermore, while Pemex may lose some of its clout and its contributions to government revenues will decline, the national GDP is expected to rise.
In addition, Pemex may gain from the liberalization of the oil sector. As Samford explains, “Pemex may gain technical capacities from partnerships with multinationals such that it is able to develop and use these technologies on its own and thus revitalize itself in this sense. Foreign direct investment is then justified by these technology and knowledge spillovers.” If this becomes the case, then Pemex could improve and create even more jobs for the Mexican people. Overall, fears of potential economic destabilization must be put aside to allow Mexico to pursue a new economic direction.
While some are still unsure how the passing of the second energy reform bill will affect the Mexican economy, it seems as if the promotion of these new bills is part of a bigger movement to ignite neoliberal reforms in Mexican governmental institutions. (Its electric power sector also recently experienced reforms that allowed for private entities to take part in the industry.) With the second bill concerning oil policy reformation recently passed, not only Mexico’s energy sector but also Mexico as a whole appears headed towards a new era of neoliberalism. Although the Pact for Mexico has been broken by the PRD, President Nieto’s aggressive economic agenda surely will not stop with the passing of this second bill. Instead, what began as only a proposition to reform oil policy may have serious implications for Mexico and its entire economic structure. In fact, it may act as the fuel necessary to push future reforms and the Mexican economy forward.
Image credit: Marketwatch