Climate Change and Security

US-Mexico Energy Politics: Growing Potential for Cooperation

Ties between the US and Mexico have brought up concerns about the impacts the current relationship has on their respective economies and energy security. Energy Analyst Jude Buenaseda outlines the many reasons why increasing energy cooperation can be beneficial to both Mexico and the United States.

BY: JUDE BUENASEDA

The relationship between the United States and Mexico has evolved and continues to do so in an integrated network that affects both countries’ economies and resources. Arrangements like the North American Free Trade Agreement (NAFTA) have made the incorporation of these two states easier with the movement of goods and resources crossing their respective borders. The shared border of the two nations is a boon for the energy sector and has the potential to truly reap the benefits of an integrated energy system if the political directions are mutual. The US Shale Revolution has marked an unprecedented boom of both shale oil and gas that can offset the Organization of the Petroleum Exporting Countries’ (OPEC) domination and increase energy independence in the North American Region. Mexico, on the other hand, recently deregulated their energy market opening doors for foreign investments and companies which allow competition to incentivize economic growth. Combined, the US shale revolution and Mexico’s decision to deregulate their energy market will be the main factors affecting the future of Mexico and the US energy relationship.

THE US SHALE REVOLUTION

The US Shale Revolution has been successful in large part due to advanced fracking technologies and the continuous exploration for more resources. Old and newly discovered fields soon had numerous rigs in them, extracting hydrocarbons even surpassing Russia as the world’s top producer of both oil and natural gas in 2012. As a result of the horizontal drilling of shale using chemical mixtures of water, sand, and pressure, shale fields like the Marcellus in Pennsylvania and Eagle Ford in Texas have seen a remarkable increase of potential production that no one was able to predict.

Natural Gas Estimated Reserves Growth from 2009 – 2013 in the US by fields (billion cubic feet)

Source: Natural Gas Reserves Data 2009 & 2013, EIA

Source: Natural Gas Reserves Data 2009 & 2013, EIA

The shale revolution has since put the US in a more powerful position when it comes to energy security issues, allowing the US to use it as leverage when negotiating energy and trade deals. Without doubt, the revolution has greatly impacted the US relationship with Mexico as well as their energy trade. The abundance of US shale oil and gas has driven the prices low making it attractive not only to the rest of the world but to their southern neighbor who is also enduring a revolution of their own. High oil and gas prices in Mexico have increased the demand of cheap imports. US shale oil and gas can offer the closest source of cheap energy imports.

THE DEREGULATION OF MEXICO’S ENERGY SECTOR

The high fuel prices coming down the pipelines of Mexico and the removal of subsidies has made electricity prices almost 75% higher than US prices—creating an uproar among the Mexican people. The decision made by the Mexican government to deregulate their energy sector in 2014 was to alleviate this problem. However, the decision has seen both positive and negative reactions from its citizens and private businesses. The unsatisfied citizens have marched and protested against the 20% price hike in the streets of Mexico, giving birth to their own energy revolution called gasolinazo. The state oil company Pemex has run a monopoly in the country’s energy sector but now has opened itself to foreign companies. The unrest caused by gasolinazo has given Mexico a greater incentive to make any foreign energy deals go smoothly as possible. By taking advantage of the US shale revolution and their cheap fuel, the newly open energy sector in Mexico can become a target destination market for the US.

The US and Mexico energy dynamics should share similar characteristics due to their shared proximity and regional congruencies but their respective approaches make their energy profiles quite different. With the help of the recent deregulation in Mexico, foreign companies can bridge the differences in the US-Mexico energy evolution. For example, the use of natural gas to generate electricity for both countries has already risen tremendously. Mexico’s electricity generation coming from natural gas has increased from 34% to 54% between 2005 and 2015. At the same time, the US’ 29% natural gas consumption has been used mostly for electricity generation.

 

                                                                                                                                                   Source: Mexico & USA EIA Energy Profile, 2015

                                                                                                                                                   Source: Mexico & USA EIA Energy Profile, 2015

Until foreign investments and foreign companies start flooding the market in Mexico, importing from the US is the cheapest and fastest way to meet their energy needs. But regardless of foreign stakeholders taking part in Mexico’s energy deregulation, the dependency on US shale builds a stronger regional energy relationship between the two countries and incentivizes the synchronization of energy infrastructure of both countries overall. The development of pipelines and their capacities crossing the US-Mexican border and the extensions domestically have doubled in the past five years mounting the involvement of the two countries’ energy dependency. US natural gas exports to Mexico has tripled since 2009, wherein the US is exporting a total of 1.25 trillion cubic feet of gas.

The interdependence of Mexico and the US does not rely solely on gas but crude oil as well. Mexico exports about 600,000 barrels per day of crude oil to the US, which the US actually sends back to Mexico after it is refined into gasoline and diesel. Mexico’s energy exports to the US were worth about $10 billion and US energy exports to Mexico were nearly $20 billion—double the amount it receives from Mexico. Alongside the energy relationship of the US and Mexico, NAFTA and its role in the nature of US-Mexico trade is one of many other factors that has the potential to hinder the progress and development of a stronger North American energy partnership.

NORTH AMERICAN FREE TRADE AGREEMENT

The negotiations of NAFTA in 1993 excluded energy trade deals directly between the US and Mexico; however, the businesses processes between the two countries can be directly affected if the agreement is altered. US law requires a permit to export natural gas and other resources to free-trade-agreement partners such as Mexico and Canada. Should NAFTA be terminated, US exporters would need to return to the Department of Energy to undergo permit reviews every time they export to Mexico and vice versa. The steadiness of resource flow can be disrupted and cause turmoil on the ground in Mexico as well as aggravate businesses in the US. The massive amounts of natural gas and crude oil coming in and out of both countries increases the number of opportunities for US and Mexican energy companies to invest in an integrated system. Additionally, with the help of NAFTA, the ease of trade can bring cheaper electricity rates to Mexico’s industrial centers creating a cross-border electricity trade that will boost both countries’ economies through competition.

US companies are not the only ones doing business in Mexico. The deregulation opens the energy sector to the world and Mexico’s open market is a big opportunity globally. There are about $90 billion worth of investment commitments in Mexico from companies in China, France, the UK, Canada, Japan, Germany, and Australia. Even without NAFTA, Mexico will be open to other investors albeit being outside the continent; consequently affecting the US and therefore losing their number one market in the long-term.

The Future of Gas & Oil

The unintentional sudden drop of the price of oil in light of the US Shale Revolution has caused a ripple effect on oil-dependent nations including Mexico. US buyers were paying about $90 per barrel for Mexican Mayan Crude Oil, but due to the drop of global energy prices, the price per barrel went down to about $27. Oil production in Mexico was not profitable enough to keep supplying a great amount to the US and therefore has declined dramatically. The oil trade dynamics have transformed Mexico into an import nation relying on the cheapest imports they can attain. Mexico has turned their focus to foreign investments and importing natural gas, which is a more profitable feat, creating reliable assets in the long run, as well as increasing production and stabilizing its prices.

Mexico has become one of the most important markets for US gas producers. One of the unique characteristics of gas is that it requires a production cap in certain seasons like winter because the demand is not high enough and over production can hurt the economy due to limited storage. A high demand coming from Mexico offsets this problem and gas producers can continue on with their businesses without worrying about sudden price changes. US natural gas exports to Mexico amount to 5% and account for 80% of Mexico’s total gas imports; this trend is predicted to continue to grow over in the future.

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US and Mexico cooperation in terms of energy has the potential to be a powerhouse in the region. Both countries have the resources, technology, and the geographical advantages to boost their economies, which would result in job creation. The issue of energy security will also be addressed given the abundance of energy resources in addition to various new investments in sustainable energy resources. Keeping the NAFTA agreement will allow efficient business operations to continue on both sides. The US and Mexico can look forward to a prosperous future if they continue to rely and support each other according to their energy needs.

Jude Buenaseda is a Fellow at Advanced Energy Group and also works at the Austrian Mission to the United Nations. He is currently pursuing a Master’s degree in Energy. 

Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.

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