Energy Reform in Mexico and Brazil

"The Offshore Drilling Oil Rig And Supply Boat Side View" by num_skyman at
“The Offshore Drilling Oil Rig And Supply Boat Side View” by num_skyman at

I’ve just returned from three weeks in southern Mexico, where the biggest political issue in the news has been the President’s energy reform plan. In 1938 Mexican President Lazaro Cardenas nationalized the petroleum industry. This measure attracted popular acclaim in Mexico, and fury in the United States. While President Roosevelt was pressured to act, he knew that World War Two was coming, and had little interest in alienating a key neighbor. The state oil company PEMEX is now Mexico’s largest economic organization, and a source of national pride. When you travel in Mexico, all of the gas stations have the green stripe and red eagle of PEMEX. But now the company faces massive challenges.

Because the federal government is the key stakeholder in PEMEX,  its decisions have sometimes been driven as much by political considerations as by its financial interests. Perhaps as result, PEMEX has gone increasingly into debt, even though it has not made sufficient investments in new technologies to replace tired oil fields. The company pays perhaps 40% of the federal government’s budget, so the health of PEMEX affects all Mexicans. But many commentators warn that Mexico faces a slow decline in energy production without both reforms and foreign investment. In particular, the Mexican government would like U.S. expertise both in the area of shale gas development and deep sea exploration.

These pressures created a heated political debate, as President Enrique Pena Nieto argued for energy reform, while many grassroots organizations and political leaders responded that oil was the patrimony of the entire Mexican people and that the legacy of the revolution could not be abandoned. Because opening the energy sector to foreign investment and companies entailed a constitutional change, the key moment in the debate came in December 2013, when the 17th state in Mexico ratified this proposed amendment. But this victory did not end the public discussion of this topic. In Mexico I watched television ads that promised that this reform would lower peoples’ electrical bills, while also decreasing the cost of food, because fertilizer would become less expensive. The local papers in Oaxaca were filled with editorials and letters warning about the lessons of NAFTA, which people argued had not brought the growth to Mexico that had been expected. After all, over the last twenty years, Brazil has become the regional leader in Latin America, while Mexico has suffered from relatively low growth. In most of these letters, there was an explicit comparison of the promises made by neoliberals with NAFTA, and those now made by the current Mexican government about energy reform.

One point that was clear to me while in Mexico was the disparity in resources between the two sides in the argument. After my flight out of Oaxaca was unexpectedly cancelled at the airport, I was put on a bus to Mexico City. As I approached the capital, I saw a billboard that promised that energy reform would benefit the country’s agricultural sector. The billboard had a large image of a shiny new tractor. After I passed that billboard I then saw graffiti on the brick walls of businesses and houses along the highway, which said “Petroleum for all Mexicans!” and “No to Neoliberalism!” There may yet be a national referendum on the issue, but most external observers believe that this project will now move ahead, because it is core to the political agenda of the PRI. Ironically this political party claims that it is the true heir to revolutionary ideals, although it is now adopting a more neoliberal energy program.

In my first book, I looked at a bitter struggle over petroleum nationalism within the Brazilian military. Brazil’s national oil company, Petrobras, was only formed in the 1950s, much later than its Mexican equivalent. But it may have a better international reputation for technical competence than PEMEX, and Brazilians take great pride in its successes. While Petrobras is a mixed corporation, the Brazilian government is still the largest owner of shares in the company. In the period around 2007 the company began to find a series of major off-shore oil finds, in the so-called Tupi or “pre-salt” deposits. This created a period of heady optimism under President Lula, as people imagined that Brazil might become a major global oil exporter. Over the last few years, however, progress has been disappointingly slow, in part because of the great technical difficulties in extracting oil from such extreme depths. Some economists have argued that Brazil needs foreign capital given the scale of the resources needed to extract this oil. I think that it is very unlikely that Brazil will follow Mexico’s path and further liberalize its petroleum market. Petroleum nationalism is an equally powerful force in both nations, but the two countries are in very different positions in terms of their energy challenges. Brazil’s question is not how to stop a slow decline, but rather how to maximize growth. For this reason, I think that the Mexican experiment is unlikely to be repeated by the other great Latin American economic power. What is now unfolding in the economies of Mexico and Brazil in some respects resembles a massive social science experiment, and the results and contrasts will be closely observed around the globe.

The PRI has made many promises with the energy reform. If it is unable to deliver the benefits to average Mexicans that it has promised in billboards, television ads and speeches, it could face a serious backlash. Neoliberalism also remains a painful term in much of Latin America, where it is associated with the conditionality exercised by the World Bank and IMF, and the controversy over NAFTA. For all these reasons, the PRI has taken a large gamble, and will need need to prove to its citizens that this reform really can positively impact their economy and their lives.

To read my own book on military terror and political history in Brazil, please click here.

Shawn Smallman, Portland State University.

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