Mexico Politics and Energy Reform Efforts

The ongoing political struggle between the ruling Institutional Revolutionary Party (PRI) and the center-right National Action Party (PAN) and the Party of the Democratic Revolution for power and influence has created a drag on President Enrique Pena Nieto’s ambitious vision for energy reform. But as these entrenched career politicians squabble with their own narrow agendas in mind, they ought to keep focus on the Mexican public interest and the global economy.

Mexico could play a pivotal role in helping keep oil markets stable and replacing its own financial coffers at a time of great supply disruption, if it could just stay the course and open its own oil and gas resources to competitive and transparent international investment. Inaction would have incredibly negative ramifications for Mexico, which risks becoming a net oil importer by the next decade if it cannot get its act together. For the global economy the stakes are equally high as major oil producers around the world – from Libya to Iraq to Nigeria– devolve into destructive civil conflict that is hindering their oil industries and hampering international supplies. If Mexico becomes a net importer, it might find the global market of the future may not be to its liking.

Were Mexico able to fully develop its oil in line with international standards and technology, Mexican citizens could earn $1,055 per capita per year by 2020, versus only $546 if Pena Nieto’s reforms run amuck. Prior to the current chance of dynamic change in Mexico’s oil sector, falling overall production and growing internal demand posed serious challenges for the country.

Mexico’s opposition politicians would have you believe that they intend to distribute oil surpluses generated from the national oil patrimony to the benefit of the Mexican people as a whole. Instead, existing federal spending practices benefit the country’s most wealthy citizens –its top 10%. Oxford economist Paul Segal studied the regressive structure of Mexico’s current system of oil revenue allocation and compared it to the pattern that would prevail if every Mexican received a direct and equal share of the proceeds from their country’s oil receipts. The results of this theoretically grounded, but carefully measured, exercise are both surprising and thought provoking. Segal’s analysis found that the net effect of the fiscal system in 2006 was to transfer entitlements to the wealthiest 10% of the population, rather than those who were more in need of assistance.

On the other hand, if revenue shares were distributed directly to citizens as a resource dividend in cash rather than indirectly via government services, one result would be to completely eliminate the extreme poverty that still afflicted 16.5% of the Mexican population at the end of the last decade. The same oil rents could be distributed through universal entitlements to government services and social security, with similar effects. (Segal found that overall income inequality as measured by the Gini coefficient, a commonly used measure of inequality of income or wealth, would decline by the substantial figure of 19%.)

The message of Professor Segal’s analysis should be clear. Mexico’s voters need to rally around good stewardship of their shared subsoil resources.

The costs of lingering political stalemate on oil reform for average Mexican citizens could be quite large — an argument that the average man on the street in Mexico should heed. Mexico could have an oil and gas revolution similar to that of the United States, were its citizens to demand its politicians focus on its future national interest instead of parochial, historically outdated storylines. Who exactly would opening to broader investment capital and advanced drilling technologies hurt? Our research shows certainly not average Mexicans who would certainly be better off from the implementation of the oil reform. As a new generation of voters comes forth in Mexico, it must demand that business as usual politics be ended for good in favor of economic reforms that both allow for greater competition and transparency in the oil sector as well as more equitable distribution of the benefits.

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