Martin Feldstein
OCT 28, 2014
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MEXICO CITY – Mexico is poised to become Latin America’s economic star in the coming decade. The government’s recent reform of the energy sector will contribute directly to economic performance by reducing the cost of manufacturing. In the context of the North American Free Trade Agreement (NAFTA), the resulting increase in manufacturing competitiveness promises to boost Mexico’s growth substantially.
Until the government adopted the necessary constitutional amendment and enacted the associated enabling legislation, Mexico’s energy sector was entirely state-owned. The sector’s most important component, Pemex, owned all of Mexico’s oil and gas reserves, and was exclusively responsible for exploration, production, and retail distribution. Electricity production and distribution, too, was entirely in the hands of the government.
Pemex’s limited technical know-how meant that it could not fully develop and exploit Mexico’s vast oil and gas resources. There are substantial oil reserves that require deep-water drilling technology that the company lacks. There are also old wells that have stopped producing but that could be made productive again with modern technologies. And there are potential gas and oil fields that can be tapped only with the new technologies of fracking and horizontal drilling.
Until the reform, energy reserves had long been regarded as a national patrimony that could be developed only by Pemex. Because the constitution prohibited any direct or indirect foreign ownership, there was no way to provide incentives for foreign firms to share their technology. But that foreign technology offered such important potential gains that President Enrique Peña Nieto was able to marshal a majority in the Mexican congress to amend the constitution and pass legislation that will bring foreign energy firms to the country.
Opening the energy sector completes the agenda of economic integration that began when NAFTA was approved in 1994. That agreement transformed Mexico from a very closed economy with few manufacturing exports into an economy that is now closely linked with the United States. The expansion of Mexican oil and gas production will consolidate those links and contribute to North American energy Independence.
Read more at http://www.project-syndicate.org/commentary/mexico-energy-reforms-manufacturing-competitiveness-by-martin-feldstein-2014-10#6v0MrVtOdIE5xkMT.99
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