Mexico Is Paying the Price for AMLO’s Failed Energy Policies

Mexico Is Paying the Price for AMLO’s Failed Energy Policies
Mexican President Andres Manuel Lopez Obrador speaks during his daily press conference at the National Palace, in Mexico City, June 22, 2022 (AP photo by Marco Ugarte).
The pollution hanging over Mexico City is nearing its worst levels in decades, a direct result of Mexican President Andres Manuel Lopez Obrador’s energy policies. To make matters worse, those policies also conflict with the current geopolitical environment, global environmental standards and the country’s trade agreement with the United States. AMLO, as the Mexican president is known, is an energy nationalist. He believes that the oil and natural gas found both underground and offshore in Mexico should be explored, developed and refined by its state-owned energy company, Pemex, rather than foreign conglomerates, and that it should be sold directly to consumers in Mexico. He also believes Mexico should achieve energy independence, particularly from the United States, from which it currently imports significant quantities of its refined gasoline and natural gas. Relying on U.S. imports, he fears, would leave Mexico vulnerable should there ever be a serious dispute between the two neighbors. There is a logic to Lopez Obrador’s position, and he is not the only world leader to aspire to energy independence these days. Europe is currently dealing with the fallout of its dependence on Russian energy sources. Lopez Obrador fears a similar scenario, given the historical tensions between the U.S. and Mexico, as well as the current erratic political situation in the United States. By achieving energy independence, Mexico could also avoid the domestic instability many countries around the world are currently facing due to high energy prices and fuel shortages. Additionally, higher global energy prices mean increased revenue from Mexico’s significant exports of hydrocarbons, which would benefit its population. But that logic notwithstanding, AMLO has implemented his energy policies poorly, and his failures could cost Mexico in the short and long term, in terms of both energy prices and availability. One particular area of concern has been how AMLO has treated—many would say mistreated—renewable energy companies. Solar and wind projects in Mexico have seen their permits revoked, blocked or otherwise administratively stalled to prevent them from moving forward. AMLO’s preference for burning oil from Pemex for electricity, instead of using clean and renewable energy sources, has not only affected the investors in those projects. It has also forced Mexico to renege on its climate change commitments, made under the previous two administrations. Mexico City’s pollution levels, too, have spiked recently because its electricity increasingly comes from burning fuel oil produced by the local refinery, a direct result of measures implemented by AMLO. It’s notable that AMLO’s anti-environmental positions make him an outlier compared to other mainstream leftist leaders in Latin America. But they even make him an outlier compared to leaders of the mainstream right, many of whom believe in climate change and have taken government action to promote cleaner energy matrices. Another cause for concern is that Mexico’s efforts to promote its own state energy sector have come at the expense of foreign companies, violating the U.S.-Mexico-Canada Agreement governing trade with the United States. During AMLO’s term in office, the Mexican government has seized a fuel storage terminal owned by U.S. investors and leased space on natural gas pipelines, only to leave it unused, in order to force higher prices on private gas companies. And it has altered electricity regulations to benefit Pemex and the Federal Electricity Commission, again at the expense of private-sector natural gas, power plant and renewable power projects.

AMLO has implemented his energy policies poorly, and his failures could cost Mexico in the short and long term, in terms of both energy prices and availability.

Lopez Obrador initially attempted to overhaul the energy sector by amending the Mexican constitution, but his proposals failed to pass through the Mexican Congress. Nevertheless, regulations issued by executive order and basic legislation have been powerful enough to allow AMLO to reshape oil exploration and the electricity market heavily in favor of state businesses. In the process, private sector companies that invested in Mexico over the past decade feel they have been treated unfairly. This will be a problem should a future president wish to invite foreign companies back into the country. Mexico has lost a lot of credibility, and investors will be hesitant to trust that future administrations will not punish them the way AMLO has. Lopez Obrador’s push to favor state enterprises and punish the private sector might be forgiven if the state were running its new energy system effectively and transparently. It is not. Billions of dollars are being spent to build a new refinery at Dos Bocas in Lopez Obrador’s home state of Tabasco, even though most of Mexico’s current refineries are running below 50 percent capacity. An effort to improve capacity at existing refineries has been understaffed and underfunded, barely managing to keep up with ongoing maintenance, let alone upgrade the system. AMLO has blocked new offshore exploration by private companies, but Pemex lacks the technology to do it, meaning oil production will likely decline in the near future. In fairness, Mexico is in its current position in part because of how AMLO’s predecessor, former President Enrique Pena Nieto, passed his own energy reforms in 2013 and 2014. While foreign investors and the international media looked on those measures favorably, the government overpromised and underdelivered on the domestic front. The public was barraged with commercials promising lower energy prices, but Pena Nieto’s party—the Institutional Revolutionary Party, or PRI—pushed the reforms through Congress and state-level governments without ever getting the full buy-in of the Mexican public. AMLO clearly benefits from the PRI’s political failure on energy reform, as well as on many other issues. However, he should also learn from it. There is a risk that AMLO is overselling the benefits of his own energy initiatives. Keeping fuel and electricity prices from rising may not be sustainable given Mexico’s budget constraints over the medium term. Some analysts have warned of potential brownouts as demand outstrips supply. And then, there is the air pollution and the impact on climate change. Citizens, particularly those living in Mexico City and Monterrey, can see the result of AMLO’s policies and feel it in their lungs. Energy nationalism won’t be popular if people view the impact as bad for their lives and their health.

James Bosworth is the founder of Hxagon, a firm that does political risk analysis and bespoke research in emerging and frontier markets. He has two decades of experience analyzing politics, economics and security in Latin America and the Caribbean.

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