Hidden in Plain Sight: Hope and Anger Over Mexico’s Oil Reforms

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Protesters gathered by the thousands last week outside government buildings in central Mexico City. Image courtesy of Reuters.

Popular protests are hardly a rare occurrence in the world today, but even with this in mind the past few weeks have seemed particularly tense. Ongoing demonstrations in Thailand have spurred talk of another regime change in Southeast Asia. Civilians in Egypt have been agitating over dissatisfaction with the country’s newly drafted Constitution. Even Europe’s been a hotbed of activity, with an unexpected change of heart in Ukraine towards a deal with the EU stirring up unrest in the streets that’s reminiscent of the 2004 Orange Revolution.

However, today we’re turning the spotlight closer to home, to the country just south of the United States’ border. It seems that discussion of Mexico these days often centers around issues of immigration and drug violence, so it’s surprisingly easy to forget that the country is also the 10th largest producer of crude oil in the world and the third largest in Latin America (after Venezuela and Brazil). This fact is about to become a lot more relevant as Mexico seems poised to pass legislation allowing foreign private investment in the oil sector for the first time in 75 years. The potential obstacles? Tens of thousands of protestors occupying the center of Mexico City to stop it.

Energy reform has been on the books for a while. Mexican President Enrique Pena Nieto’s breached the idea in August as part of his expansive reform plan for Mexico that has also included changes in education and the telecommunications industry, and is meant to spur investment in Mexico’s rapidly declining oil infrastructure. In its current closed-off state, Mexico’s state oil company Pemex lacks the technology and knowledge necessary to develop new oil resources, and sharing resources and know-how with other globally operational firms would go a long way towards remedying this. As is, Mexico’s oil production has fallen by 25% since its peak in 2004, and without reforms the country could become a net oil importer by 2018.

The goal of the reforms, which would take the form of constitutional amendments, is to spur efficiency by breaking up the monopolies dominated by Pemex, the state oil company, and the Federal Electricity Commission. The reforms are heavily supported by Mexico’s business sector and may be necessary to mollify that particular constituency’s dissatisfaction with a number of other reforms on Nieto’s agenda. However, these energy amendments are also the only part of Nieto’s reform plan that involves an opening of Mexico’s economy to foreign influence, and they overturn a long-standing arrangement that a large part of Mexico’s population would rather not see overturned.

The issue is that for the last three-quarters of a century, Mexico’s state control of its oil resources has been a source of national pride. The country’s energy infrastructure was officially expropriated in 1938 when conflict between foreign oil companies and domestic unions became insolvable, and this maneuver has since served as a symbol of Mexico’s independence from oppressive outside interests. Nieto’s decision to forfeit this independence has already broken up the Pact for Mexico, a historic political alliance between Nieto’s Institutional Revolutionary Party (PRI) and the leftist Democratic Revolution party. That party’s leader, Andre Lopez Obrador, is now leading the popular protests shaking up the nation’s capital. On Sunday Obrador led a tens of thousands of protestors in Mexico City in what he described as a “siege” of Mexico’s government buildings, essentially a prolonged non-violent occupation of the area outside the Senate, Lower House, and local assemblies.

This is bad news for Nieto, whose approval rating is now sitting  at 44%. However, it still seems that the reforms are likely to pass; David Penchyna, a Senate member and fellow PRI, expressed confidence on Wednesday that the party had enough votes to push the bill through the Senate and lower house. Exactly how much foreign investment the reforms will attract is another question; the PRI’s proposals are relatively modest, offering up profit-sharing opportunities for outside firms interested in helping develop new oil fields, and are similar to reforms introduced in Brazil earlier this fall. These Brazilian reforms failed to attract as much attention from investors as initially hoped, but there are reasons to think that the situation in Mexico will be different. Already, some analysts are saying Nieto’s amendments could double foreign investment in Mexico, making it the biggest boost to Mexico’s economy since the North American Free Trade Agreement (NAFTA) twenty years ago.

Despite this, the conservative National Action Party (PAN), the third significant party in Mexican politics, has more expansive ambitions, advocating the granting of oil concessions, or exclusive development and ownership licenses, to foreign firms offering up their capital. This is an especially dicey proposition because the word “concessions” brings up bad memories of Mexico’s pre-nationalization exploitation by oil firms, but PAN asserts that it’s the only way to effectively draw in new investment and have said they’ll refuse to support the reforms if they don’t include this particular detail.

This is more bad news for Nieto, who will need PAN’s support to push the reforms through the Senate. Failure to pass the reforms would not only endanger Mexico’s future oil production but also his government’s ability to balance its budget: taxes on oil revenues make up almost a third of the government’s revenue. But if Nieto needs to offer “concessions” to do it, he could have an equally unpleasant domestic situation on his hands.

For now the protesters are demonstrating peacefully, with Obrador now absent from the proceedings due to heart trouble. His Democratic Revolution’s withdraw from Mexico’s cross-party pact has left PAN and PRI to iron out the details of the reforms. The Mexican people, stationed outside the Senate building, are waiting for the results.

Featured image courtesy of Reuters


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