Mexico has suffered so much political corruption,
and for so long, that it has caused a leader like Andrés Manual López Obrador,
VisualPolitik's anti-award winner, to become a very popular politician in spite of all the
failures he has racked up in his few years at the head of the government.
AMLO is not the classic populist who shouts and insults, but he does have what is perhaps
the most important quality of any good politician: he knows how to offer citizens
exactly what they most want at any given moment. So previous presidents burnt through money? Well,
AMLO proved himself different, for example, here are a few measures: he travels economy class,
he turned the presidential residence of Los Pinos into a sort of cultural center and dispensed with
the presidential 787 aircraft. Which, by the way, nobody seems to know what to do with.
The point is that actions of this kind arouse popular sympathy.
And don't get me wrong, many of these things may be fine, particularly if we take into account the
luxurious lifestyle that typically characterizes Mexican presidents and top politicians.
But... The problem is when these things are used to justify all government action.
And it is even worse when the popular support harvested is used to cover up the fact that
the economy is not going well or that the management of the pandemic has been terrible.
The fact is that, despite the very high crime rates, the ailing economy and the pandemic,
Lopez Obrador maintains a very high approval rating among Mexican voters.
For those of you who don’t know, López Obrador is popularly known as AMLO,
for short. Of course, this is not an abbreviation that AMLO uses himself.
Practically every day and for the greater glory of the president, that is, for himself,
he holds press conferences that last for more than two hours. And that begs the question,
does the president of a country like Mexico have nothing better to do? Apparently not.
Take a look at this. A handful of words in 19
seconds. With such long press conferences, sometimes you don't even know what to say.
So why are we on VisualPolitik even talking about AMLO? Well,
it’s best not to let your guard down in front of this affable grandfather, who when he wants to,
is also nice and even endearing. And I say don’t let your guard down
because AMLO's Presidency is carrying out what is known as the Fourth Transformation of Mexico.
A political plan that consists of putting an end to, repealing, overturning the reforms
of his predecessors in order to implement his own initiatives in all kinds of areas.
The problem is that AMLO's initiatives have a lot
to do with typical Latin American policies that time and time again
have proven to be unsuccessful and usually end up scaring away productive investment.
This is precisely what is happening with the energy sector in two very clear areas.
On the one hand, there is the electricity reform. On the other,
the direction taken by the state-owned oil company, Pemex, under this presidency.
And, do you know what? It's AMLO's energy reform that we want to take a look at in this video.
What is happening in Mexico's oil sector? What does AMLO's electricity reform consist of?
And more importantly: How can all these measures affect Mexico's economy? Today on VisualPolitik
we are going to answer these questions. But first, let's take a look at a bit of history.
(THE STATE MONOPOLY)
Just a century ago, Mexico was the second largest oil producer in the world,
behind only the United States.
At that time, the sector was dominated by foreign companies. The once dominant
Compañía Mexicana El Águila [Kom Pan Ya… al Ah Gee La] had been acquired by Anglo-Dutch
Royal Dutch Shell. There were also plenty of US companies operating south of the border.
However, they soon lost interest in the Mexican deposits. The British began to exploit oil in the
Middle East and the Americans in Venezuela. You see, the problem for these companies was
that the labor movement was one of the pillars on which President Lázaro Cárdenas relied.
When they arrived, the oil companies had no idea of the mess they were getting into.
In 1938 a labor conflict spilt over into the political arena when the oil companies tried
to avoid complying with a Supreme Court ruling in favor of the workers' demands.
In trying to dodge complying with the ruling, the foreign companies saw how a labor issue
became a dispute over the nation's sovereignty. So President Lázaro Cárdenas intervened directly
in the matter by decreeing the nationalization of the oil industry. Three months later,
Cárdenas decreed the creation of Petróleos Mexicanos, Pemex,
the state-owned company that received the monopoly to exploit and manage the country's oil fields.
The move seemed to work out well for Mexico. Why? Well, let's just say
that in the 1940s the United States and the United Kingdom had other, much more important
concerns than passing the bill to Mexico. In addition, World War II and post-war economic
growth greatly increased the demand for crude oil, making nationalization the perfect business.
And take note, because the oil sector was not the only energy sector that
President Cárdenas intervened in. Before that, he had already meddled with the electricity sector.
In 1937 Cárdenas founded CFE, the Federal Electricity Commission. Its purpose was to
operate in the non-profit sector based exclusively on technical principles.
The objective was to obtain the highest possible yield at the lowest possible cost.
This meant that private companies were only interested in the most profitable areas,
the main cities and industrialized areas.
And so, the Federal Electricity Commission was left with the rural and remote areas.
Obviously this system did not work. It ruined the state-owned company and on top of that,
more than half of Mexicans were still without electricity supply. So,
what solution do you think the Mexican government adopted?
Let's see, perhaps, privatizing the market, favoring competition and
encouraging investment, for example? No, nothing of the kind.
In 1960, President Adolfo López Mateos completed the nationalization of the
electricity sector. And do you know what? At first it didn't seem to work out too badly.
Mexico had more than enough resources to deal with the bad decisions and maintain
huge subsidies for electricity consumption. Remember that the countries with oil were the
nouveau riche on the international scene. And that’s been even more the case since the 1970s.
The oil crises of 1973 and 1979 boosted the price of crude oil, multiplying Pemex's income
from its exports. In addition, in 1979, the Cantarell Complex, one of the largest
oilfields in the world, began operating. The problem was that successive Mexican
governments had complete control over the oil company and did not run it with a business
mentality. On the contrary, they squeezed it with multiple taxes and royalties to feed the
state coffers. This left PEMEX with far fewer resources to invest and expand.
The Cantarell Complex reached peak production in 2004. That year was
also the highest production year in the history of Pemex: 3.4 million barrels of crude oil per
day. Since then it has plummeted year after year to around half that number in 2020.
Of course, faced with Cantarell's decline, the remedy was almost worse than the disease. Pemex
invested $70 billion dollars between 2008 and 2012 in the exploration and production of crude oil.
The problem is that most of it was invested in areas for which
Pemex was technically ill-prepared, such as deepwater drilling and fracking. Disaster was
guaranteed. To make matters worse, the investments were made primarily with
debt because the Mexican government was unwilling to stop receiving its paychecks.
So Pemex's crisis was exacerbated by these bad investment decisions.
And if we add to all this the corruption that dominated the company for decades
and decision making that was more motivated by politics than business that, for example,
caused the oil company to have a much larger workforce than necessary, what we are left
with is an oil company that is up to its neck in debt coupled with dwindling production.
Mexico's jewel was about to fall. To avoid this happening,
it was clear that many things had to change. And that task was given to none other than
one of the governments most tainted by corruption and worst rated in Mexico's
history: that of Enrique Peña Nieto. So, of course, no matter what was done,
any measure would be tainted. Even if the reform was going in the right direction.
The fact is that the 2013 energy reform ended Pemex's state monopoly over the oil sector,
opening it up to private investment. Foreign companies were allowed to bid
in transparent auctions broadcast online to take over the exploration and production of
oil fields. It also opened the way to reducing the number of Pemex workers,
which has gone from 151,000 employees in 2013 to the current 120,000.
Nine oil auctions were completed until they were halted in July 2018, when AMLO won the election.
The balance to date is that 111 fields were awarded in those auctions and 34 have already
started their exploitation. So far, $18 billion dollars have been invested. The
Mexican State's oil income established in the contracts is approximately 74%,
one of the highest percentages in the world. So what does this all mean?
Basically, the reform attracted multi-million dollar investments from foreign companies. Private
companies that risk their money in exploration and extracting oil but then pay the Mexican State most
of the income derived from its production. All this without the Mexican government investing a
single peso. Sounds like a good deal, doesn't it? Well, as always, there is someone who disagrees.
This is what AMLO used to say when he was the leader of the opposition.
AMLO raised a fierce opposition against Peña Nieto's energy reform. As a good populist,
he went so far as to promise that he would hold a referendum so that the people could
express themselves through the reform. But, as VisualPolitik fans know by now,
politics is one thing and governing is another. In December 2018 AMLO was inaugurated as president
of Mexico. In other words, enough time has passed to begin to see what is happening in regards to
this president's energy policy. Listen up.
(GIVE ME MORE GAS)
López Obrador has held popular consultations of all kinds: to see if he should build a railroad
line or an airport. But the promised consultation on what to do with the energy reform... well,
no, not that one. That one was forgotten. Of course, this has not prevented Pemex from
continuing to be a headache for the Mexican government. Although AMLO talks about the
state-owned oil company as if it were the jewel in the crown, the reality is already very different.
Years go by and losses accumulate for Pemex. Something difficult to
understand when extracting a barrel of crude oil costs an average of $7 dollars
and can be sold for 10 times more. Of course, the Mexican State then strangles Pemex with taxes.
Keep in mind that one third of the Aztec country's public spending is
sustained by the resources extracted from the state-owned oil company. And
if we add to this the fact that the rest of Pemex's business is a real ruin,
then news like this comes as no surprise: (Pemex, among the 10 most indebted
companies on the planet. Forbes) We are talking about a debt of more than $100
billion dollars. A debt that sets new historical records every year.
So López Obrador has set to work to revive the state-owned oil company.
The first thing AMLO has done is to approve a new Hydrocarbons Law with the purpose of
favoring Pemex in the service station market. Then, regarding the opening up to foreign
investment in Mexican oil fields, AMLO bet on reviewing the contracts already awarded to check
whether or not there was corruption. In addition, as we have already seen,
oil auctions were suspended from the very moment he won the elections.
Recently, the most dangerous thing for Mexico is that its government has wanted to go a step
further and has acted directly against the interests of a consortium that has already
invested $325 million dollars in Mexico and is headed by the US oil company Talos Energy.
The result of these measures is that a very negative message has been sent to
investors. And all for what? Well, to benefit the same old people.
(Mexico's Biggest Private Oil Find Will Be Operated by State-Owned Pemex. Bloomberg)
As it stands, the result is that in spite of everything, when AMLO came to power
the Mexican oil company was producing 1.8 million barrels. Today the figure is around
1.6 million. And everything points to the fact that things are not going to get much better.
Then, if there is one thing that is truly surprising about the Mexican
economy, it is that a country that has so many oil deposits is forced to import fuels because
its refineries date back to the 19th century. This is an anomaly that AMLO has set out to
resolve. The problem is that the bill is accumulating too many zeros. So far,
more than $6 billion has been invested in modernizing the state oil company's refineries and
in buying Shell out of half of a refinery in Texas whose ownership was shared with Pemex.
So why end a partnership with Shell that has worked so well
when PEMEX manages its own assets so badly? But wait a minute, because that's practically
nothing compared to the nearly $9 billion AMLO is spending on one of his star projects:
building a refinery in his home state of Tabasco. AMLO wants nothing to come between Pemex and
Mexico's self-sufficiency in fuel production. And when we say nothing,
I assure you I mean absolutely nothing. (Pemex Is Building Refinery in Green
Area It Promised to Protect. Bloomberg) The point is that the Mexican government
is now pulling out all the stops to ensure that the country produces
all the fuel it consumes by 2023. The problem is that, as we have seen,
it does so following a recipe very similar to the one Mexico has been following for years: oil,
nationalism and a lot of interventionism without taking business criteria too much into account.
Well, enough about oil, but what about the other arm of the energy reform? What about
the electricity sector? Well... Listen up.
(THE CONSTITUTIONAL REFORM)
The nationalization of 1960 turned the electricity sector into a state monopoly
in the hands of the Federal Electricity Commission. This remained the case until
the 1990s, when a timid opening up to the private sector took place.
The so-called self-supply model was implemented, a mechanism that allowed companies to bypass
the Commission and purchase electricity from generation plants of private power
companies in a formula similar to PPAs, that is., power purchase agreements.
Openness to the private sector gained momentum with Peña Nieto's energy reform,
which boosted investment in electricity generation. A wholesale electricity market
was established that gave priority to the cheapest and most renewable energy suppliers.
Sounds pretty good, doesn't it? Not to AMLO. As Peña Nieto relegated the CFE to the background,
AMLO dedicated a good part of his efforts during 2021 to implementing
an electricity reform that would strengthen the Commission, that is, the government.
In this way, AMLO's electricity reform caused great controversy by changing the order in
which power plants dispatch energy. In the first place, the CFE's hydroelectric, fuel,
oil and coal plants would come into operation. In second place, the gas combined cycle plants
that generate their energy for the Commission. After these plants, private wind and solar
energy parks would follow. And finally, the combined gas cycles of private companies.
But let's see: Who would think of giving priority to thermal power
over renewables? Wind and solar need to be put to work when there is sun and wind.
And when there is none, you put the thermals to work. Otherwise, it doesn't make much
sense. This is electrical systems 101. The fact is that López Obrador approved this
reform months ago, but a court paralyzed it. In a country with legal certainty,
this would have been the end of the electricity reform. Not in AMLO's Mexico.
(Mexico president threatens constitutional change if power bill struck down. Reuters)
And as we say around here, no sooner said than done.
The problem for the Mexican president is that he does not technically have a
sufficient majority to approve it. And now there is no longer talk of
dispatch order but of quotas. The aim is to guarantee that the CFE's power plants produce 54%
of Mexico's electricity. And at this point you may be wondering: Why all this effort?
Well, basically because in 2020 a new international regulation came into force
that limits the sulfur in the fuel used by shipping companies. Until then, this was one
of the main markets for the fuel oil produced by Pemex refineries. They are so obsolete that
they have proved incapable of reducing their sulfur levels. So this is AMLO's objective:
to use the CFE's thermal plants to burn the fuel oil that nobody wants to buy from Pemex.
All this despite the fact it pollutes much more and its generation costs are
25% higher than those of the new renewable plants. In other words,
AMLO does not care whether Mexico produces more expensive or dirtier energy. The only
thing he cares about is to refloat Mexican state-owned companies at any price.
And if in the end that means increasing subsidies so that Mexicans' electricity
bills do not go up, well, so be it, let's just pull out the checkbook.
And even with all that, it's not the worst thing. Check it out.
With AMLO's reform, Mexico will not only have more expensive and dirtier energy, but also, looking at
the forecasts, $40 billion worth of investments in wind and solar energy are in jeopardy.
All of this is worrisome for Mexico's future because it adds to the downturn
in investment since AMLO won the election. This may end up becoming a lost opportunity
now that multinationals are looking to diversify their supply chains outside China. But investors
do not trust the Mexican president. The data speaks for itself.
But at this point the question is over to you:
Do you think it is right to prioritize the interests of state-owned companies
over the installation of renewables? What do you think of the reforms undertaken by AMLO?
You can leave me your answer in the comments. And as always,
if you found this video interesting don't forget to Like and subscribe to VisualPolitik.
All the best and see you next time.