Mexico Threatens Trade War with the U.S. over Energy Reform Roll Back

Alex Kimani

Alex Kimani is a veteran financial writer, investor, engineer, and researcher at Safehaven.com.

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• AMLO’s refusal to implement reforms that would have allowed the country’s oil and power markets to open has angered Canada and the U.S.
• The Office of the United States Trade Representative (OUSTR) will make a “final offer” to Mexico negotiators in order to open up Mexico’s markets and to allow for increased oversight.
• Mexico’s decision to reduce crude oil exports to refine its crude crude could have a negative effect on its economy.

The trade wars that erupted under the former U.S. administration were characterized by multiple battles with different countries, even close American allies like Canada. The battles often followed a specific U.S. legal reasoning. Trump called foreign imports a national security risk before imposing tariffs or quotas on imports.

Biden has a slightly better record than Trump’s, having rolled back some Trump-era tariffs, including removing tariffs from Canadian solar products. However, he chose to keep most of them in effect. Washington is now on the brink of another trade war. The Biden administration plans to send Mexico a “act now” message in the coming weeks, as their energy dispute threatens boiling over.

Mexican President Andres Manuel Lopez Obrador’s decision to reverse reforms that would have allowed Mexico’s oil and power markets to be open to outside competition has upset the U.S., Canada, and Europe. This has prompted bipartisan calls for the U.S. and Canada to be tougher on their southern neighbor. The U.S. Big Oil Companies, such asChevron Corp.(NYSE:CVX).Marathon Petroleum Corp.(NYSE:MPC) and a number of other solar and wind energy companies have struggled to get permits to operate in Mexico.

The Office of the United States Trade Representative will make a “final offer” to Mexico’s negotiators, inviting them to open their markets and to accept increased oversight. The U.S. will request an independent dispute resolution panel under the USMCA trade deal if Mexico refuses to accept the final offer. Canada and the United States demanded that Mexico enter into dispute settlement talks almost a year ago. This was far longer than the 75 days required by USMCA rules before aggrieved party can request a dispute resolution panel.

These developments raise the risk of a new full-blown trade conflict between the U.S.A. and Mexico. Mexico is the largest oil export market for the U.S., with the Latin American country selling American refineries 710,000 barrels daily by 2021. It also imports 1.16 million barrels per day. Trump had previously imposed a 25 percent levy on Mexican Steel and a 10 percent on Aluminum. He claimed that cheap imports were a threat to national security and were decimating entire communities. Trump lifted the tariffs later, marking the first time that the iconoclastic president had relaxed on protection after it was imposed.

Energy Independence

Obrador, who was elected Mexico’s president in 2018, has made many radical reforms to the country’s power and energy sectors in his quest for energy independence. He announced a controversial plan to reduce oil imports two years ago. This was in direct contradiction to a major reform plan that was enshrined by the constitution in 2013.

Mexico’s NOC was included in the plan.Petroleos MexicanosakaPemexThe goal was to reduce crude oil exports from more than a million barrels per daily to only 435,000 barrels per day by 2023. This is part of PresidentAndres Manuel Lopez ObradorAMLO’s drive to reduce imports of expensive refined products such as gasoline or diesel and instead rely more heavily on domestic production. “Practically all of the Mexican crude oil will be refined in our country.“Pemex headOctavio Romero OropezaAt the much-heralded opening a new refinery located in the southeastern state Tabasco.

The Mexican government might abandon these plans due to high oil prices and uncertain economic outlook, including high inflation.

Pemex was able to post its first profit in a decade thanks to high oil and gas prices. This, like most oil companies, led to the president declaring that Pemex is “.”It was in bankruptcy, and it is now being revived.”. Efe has been told by Victor Gomez, an economist, that oil revenues are not as important as they were once for Mexico’s economy.It is unlikely that the Mexican government will stop relying upon the export of petroleum for funds.. Gomez, a former Finance Secretariat official, now works in private sector.

Gomez claims that the oil sales have brought in a financial windfall of $2.5 billion.This is a positive note“for public accounts. After the Mexican government lifted retail fuel taxes, oil profits have covered nearly $21 billion in uncollected tax. People living in the United States drove across the border to Mexico last year in search of lower gas costs.

Obrador has also sought to secure oil as one of many energy commodities. He also attempted to protect the electricity sector by reforming it so that the state electricity group CFE 54% would be guaranteed. The proposal sought to change the regulatory environment for the electricity sector. It included cancelling power generation permits and prioritizing CFE over private renewables on national grid. The bill was rejected by Mexico’s Congress.

Obrador also plans to continue with plans for nationalization of the country’s lithium sector, following the nationalization of lithium deposits last April.It will be possible to find it, extract it and commercialize it.He signed a decree last month transferring responsibility for lithium reserves to energy ministry.

Bad Idea

Obrador’s dream of energy independence might not be a good idea. A cross-sectional analysis has shown that Mexico would not benefit from self-sufficiency. They are even skeptical about whether such an economic goal is feasible.

“The benefit of self-sufficiency is not real. It doesn’t seem possible to end all petroleum exports.Gabriela Siller Pagaza is the head of economic analysis at Banco Base. According to Siller energy security is defined by the International Energy Agency as “Energie Security”.The availability of energy sources at an affordable price.Mexico considers “” more important than self-sufficiency.

She also noted that Mexico must encourage other export products and/or increase the country’s tourism sector to reach its goals. However, such plans are not currently in place. “Mexico’s economy would be in grave danger if it stopped exporting oil without having a plan to replace the capital lost.

Eric Smith, associate director at the Tulane Energy Institute, agreed and said that Mexico cannot stop oil exports and that the president’s announcement is nothing more than political rhetoric.

“The president wants Mexico to add more value to its crude oil production. To do this, it will need more refining capacity, petrochemical processing capacity, etc., all of which require capital.“He has said.

Source: Trading Economics

Mexico’s economy requires a lot of petroleum, liquids, and natural gas. To import U.S. natural gases, more infrastructure is needed.

Mexico, however, is a classic Jekyll and Hyde example. The country’s gross domestic product (GDP) is one of the highest in the world for a developing country. It also boasts a trillion dollars. The country’s relatively large economy is offset by the fact that 44% of its population live below the poverty line. It also has the third-highest income inequality of all the 39 members of the Organisation for Economic Co-operation and Development.

Despite this, the nation’s oil industry is plagued by rampant oil theft and a thriving underground market.

Pemex’s pipelines have been the target of criminal syndicates that are associated with powerful drug trafficking organizations. They have stomped on crude oil and derivative products numerous times. The problem was so severe that the country was losing an average of 80,000 barrels of petroleum and derivative products to oil thieves by the time Obrador became president.

Alex Kimani, Oilprice.com

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