Leaders | Energy in Mexico

Make or break for Peña Nieto

Mexico’s president should push for a bolder energy reform

A YEAR ago Enrique Peña Nieto became Mexico’s president, promising a series of reforms aimed at raising the country’s unimpressive economic growth. To overcome a dozen years of legislative gridlock, he struck a “Pact for Mexico” with the opposition. All this sparked enthusiasm in the markets and led to talk of a “Mexican moment”.

In his first year, Mr Peña has done much of what he promised (see article). He has weakened the teachers’ union, which was resisting his education reforms, by arresting its leader on suspicion of embezzlement. He has created an autonomous trustbuster to challenge the dominance of Telmex, controlled by Carlos Slim, the world’s richest man, and Televisa, a big television company. A banking reform should make lending easier in a country where credit as a proportion of GDP stands at little over half the Latin American average.

But Mr Peña has had to trim. In particular, he dropped his plan for a thorough overhaul of the tax system. Instead, his finance minister cobbled together, with the Party of the Democratic Revolution (PRD), the leftist opposition, an ill-thought-out ragbag of tax rises that has infuriated the private sector. That matters, since the economy is languishing.

Mr Peña now has a golden opportunity to redeem himself and to revive the private sector’s spirits. The most urgently needed reform is of the energy sector. Oil and gas have been a state monopoly since 1938, with disastrous results of late. Pemex, the grossly overstaffed, inefficient and overtaxed state oil and gas giant, has overseen a decline in oil production (down by 20% in a decade) and proven reserves (down by a third) and a rise in energy imports. It lacks the technology and the capital to exploit Mexico’s abundant resources of deep-sea oil and shale gas, or to build new refineries and pipelines. A second inefficient state monopoly, the Federal Electricity Commission, is one reason why industrial users now pay around twice as much for power as their competitors north of the border.

Join the shale-gas revolution, or lose out to it

There is a second reason why a comprehensive energy reform is crucial. Mexico’s best hope of faster growth lies in “nearshoring”—wooing manufacturers that supply the North American market. But the country is beginning to lose its cost advantage because shale gas has cut the price of energy for industry in the United States, while a shortage of pipelines means that it has to import energy expensively from elsewhere.

Mr Peña’s draft energy reform, revealed in August, was disappointing. It would change the constitution to let private firms work with Pemex, but would offer them only a share of the profits, not any oil. That may not be enough to attract sufficient investment: oil majors are more excited by measurable oil rather than paper profits. The conservative opposition National Action Party (PAN), part of the Pact for Mexico, wants to go further: it would offer private investors the chance to bid for licences, under which they would extract oil and gas in return for paying royalties and taxes to the state. That is a formula which has worked well in Norway and many other countries.

Most Mexicans oppose any change in energy policy. But only a vocal minority do so passionately. Both the PAN and Mr Peña, in the past, have praised the Norwegian model. So last year’s election provided a mandate for introducing it. The president should back the PAN’s more ambitious plan and explain to Mexicans that under the current disposition, the oil is not theirs at all, but is exploited mainly for the benefit of Pemex, its unions and suppliers.

Mr Peña knows that many of his other reforms will take years, both to implement and to boost growth. A bold energy reform can be the making of his presidency. Fumble it, and Mexico’s moment may prove to have been a fleeting one.

This article appeared in the Leaders section of the print edition under the headline "Make or break for Peña Nieto"

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