President Barack Obama, Canadian Prime Minister Stephen Harper, and Mexican President Enrique Peña Nieto will travel to Toluca, Mexico on Wednesday for the annual, North American Leaders’ Summit, which aims to promote economic and security cooperation amongst the three nations.
The “Three Amigos Summit,” as the media refers to it, comes at an important time for the United States, Canada and Mexico, as North America stands at an energy crossroads.
James Lindsay, vice-president of the Council on Foreign Relations, explained in his podcast, the World Next Week, technological innovations and important legislative processes are now in motion across the continent, which will have enormous ramification for global energy markets. While much has been written on key topics, such as the potential of shale production in the United States and the Keystone pipeline, much less emphasis has been placed on similarly important developments south of the border. For example, in December, Mexico’s congress passed a landmark reform of its energy industry, which will have a similarly enormous effect on the globe.
Mexico is one of the most important oil producers in the world, a fact not known by many Americans. Producing nearly 2.5 million barrels every year, it is the world’s 10th largest oil producer and the 3rd largest oil exporter to the United States. Mexico also has vast, untapped oil reserves, as experts estimate that deep-water fields in the Gulf of Mexico hold 26.6 billion barrels of crude oil. Onshore, there lies approximately 60 billion barrels. However, Mexican oil production, surprisingly, declined over the last decade. After a peak in 2004, it plummeted 25%, even as global oil prices skyrocketed.
What happened? The answer requires a quick look at Mexican history. Seventy-five years ago, foreign companies completely ran oil production in Mexico. Large profits were ferreted abroad, as locals carried out the grimy, grunt work in appalling conditions. After a national strike by oil workers, the Mexican government nationalized oil production, permanently blocking foreign investment in the oil industry. Through a constitutional amendment, the government then granted Pemex, the state-owned oil company, a complete monopoly over oil production. Easily accessible sources of oil were plentiful, allowing Pemex to extract large amounts of oil, despite rampant corruption within the company. However, over the last decade, these abundant sources of oil dried up, resulting in a steady decline in oil production. Last year, for instance, Pemex posted a loss of over $10 billion, a tab later picked up by the Mexican government. Therefore, in order to boost production and thereby, revenue, Mexico needs to tap its large deep-water oil reserves, as well as the oil that lies in shale deposits. The problem? Pemex lacks the expertise to do so. It needs partners. It needs foreign investment.
Now, that’s possible. In December, Mexico finally broke up Pemex’s monopoly on oil production, opening the nation’s oil fields to foreign investors (a full summary of the reforms can be found here). It is difficult to overstate the significance of this development. As a result of this liberalization, Mexico will likely see an increase of $20 billion in foreign investment. Meanwhile, oil production is predicted to double, which is the equivalent of adding another Nigeria to global oil supply (for context, Nigeria is the largest oil producer in Africa and the 11th largest in the world). An increase of this magnitude in Mexican oil production will have a large effect on oil prices. Some estimate that the price of a barrel of crude oil could fall from $108.62 a barrel to $88 a barrel by 2017.
What does this mean for the United States? Falling oil prices could boost investment and consumption, creating growth in the United States. Along with growing oil and natural gas production in the US and Canada, Mexico’s oil reforms mean that North American energy independence is more than just a possibility. Within two years, if predictions are correct, North America will produce more oil than every member of OPEC, except for Saudi Arabia. That has enormous foreign policy ramifications for the United States as well.
Of course, the Mexican government still has to implement these reform measures, which may be even more difficult than passing the historic bill. However, the potential benefits are so great, that we ought to pay attention to these developments south of border. If Mexico can successfully carry out reforms of its oil industry, the Three Amigos will have much to talk about over the next decade.