Ricardo Anaya Cortés, President Enrique Peña Nieto, and Raúl Cervantes Andrade after signing Promulgación de la Reforma Constitucional en Materia Energética, Mexico City, December 20, 2013.*
Seth Clare and Samer Mosis**
Part 1: Introduction & Mexico
Political commentators and analysts began 2017 greatly preoccupied with the rise of populism, as exhibited by headlines from earlier in the year. The Atlantic’s “Is Donald Trump a Populist Authoritarian?,” The New York Times’ “Marine Le Pen Echoes Trump’s Bleak Populism in French Campaign Kickoff,” and The Diplomat’s “The Global Populist Surge Is More than Just a Western Story,” all highlight this growing anxiety, particularly in the West.[i]
Perhaps populism receives so much attention because it is misunderstood as well as feared. Not unlike “Brexit,” the word has been used so often and in so many contexts it has become nearly meaningless. The Economist asks, “Populists may be militarists, pacifists, admirers of Che Guevara or of Ayn Rand; they may be tree-hugging pipeline opponents or drill-baby-drill climate-change deniers. What makes them all ‘populists,’ and does the word actually mean anything?”[ii]
Populism is usually discussed as a political movement within a democracy, but this article will deal with it in the context of economic policy. Writing from the perspective of liberal economists, we define populist economics as the market-distorting policies through which governments buy the support of their people. These are policies disavowed by technocrats, designed to win support of the “common man” at the expense of market efficiencies. Such policies are all too familiar in the oil-producing states of the world.
With this admittedly loose definition in mind, this short article seeks to call attention to a couple of emerging market oil producers that began 2017 by rejecting populist economics. With a brief analysis of democratic Mexico and monarchical Saudi Arabia, we explore how these oil-dependent states are responding to lower commodity prices by moving away from long histories of populist economics. In 2014 crude markets collapsed and now, even with help from OPEC, benchmark WTI crude oil prices struggle to stay above the psychologically-critical $50/barrel level.[iii]
For all their differences, leaders in both Riyadh and Mexico City are to some extent accountable to their citizens, yet have had no choice but to make painful reforms in a new era of sustained weak commodity prices, much to the chagrin of their peoples. These include new taxes, fewer market controls, lower fuel and electricity subsidies, monopoly-busting, increased transparency and liberalization of state-owned enterprises, other reductions in social spending, and a renewed openness to foreign workers, capital, and technology. We concede that such reforms will be painful for many in the short-term, but believe the long-term economic growth these changes will support are well worth the cost.
More interestingly, we believe the hardship of low oil prices has provided certain emerging market oil and gas producers with an incidental vaccine to the populist contagion infecting more diversified, developed economies. As we will show, Saudi Arabia and Mexico’s dependence on oil rents has catalyzed some praiseworthy policymaking. This stands in worrying contrast to the US energy sector, which has seen the tenants of transparency, free trade, and openness to foreign talent come under fire since the start of the Trump presidency.
Oil holds a special place in Mexico’s history and identity. In the 1920s, after oil was discovered there, foreign investors and companies were mostly responsible for turning the country into one of the world’s largest producers. Even today, some Mexicans take pride in the expulsion of those foreign oil interests and the creation of a national oil monopoly (now Petróleos Mexicanos or known as “PEMEX”) in 1938, which symbolized liberation from imperialism and returned oil rents to the state. As such, oil nationalization “has almost as sentimental a place in Mexico’s national mindset as the Mexican Revolution, and thus always becomes a very steep hill for Mexican policymakers to overcome.”[iv]
Even after years of losses, ballooning debts, skyrocketing pension liabilities, low worker productivity, and chronic underinvestment in exploration, PEMEX’s control of the country’s oil remains a matter of national dignity for some. One poll from the Centro de Investigación y Docencia Económicas (CIDE) found that 65 out of every 100 Mexicans were against weakening Pemex’s oil monopoly. “Energy, particularly oil, continues to be the stronghold of Mexican nationalism,” CIDE concluded.[v] In 2013, President Enrique Peña Nieto’s successful bid to reform PEMEX was therefore nothing short of revolutionary, requiring a two-thirds vote in the Mexican Congress and approval by a majority of the country’s 32 state legislatures in order to amend the Constitution. Liberalizing PEMEX was anathema to populist currents in Mexico: immediately painful and unpopular for ordinary citizens, but with public benefits extending to future generations.
Although Mexico remains a major oil player in the Americas, pumping some 2.6 million b/d of petroleum and other liquids in 2015, production has been in decline for over a decade as the most productive onshore plays— especially the Cantarell field— mature.[vi] The oil sector generated 6% of the country’s export earnings in 2015, down from around 30% in 2009. This is not fiscally sustainable for the state as PEMEX, the single largest taxpayer in Mexico, funds about a third of the public budget. The International Monetary Fund (IMF) identified further declines in oil production as a major macroeconomic risk to growth in a 2016 Article IV report.[vii] Oil is so important to Mexico’s government that it conducts the largest sovereign oil hedge in the world.[viii] Mexico’s finance ministry has averaged about $1 billion a year on oil hedge spending over the past decade, dwarfing the $133.5 million PEMEX reportedly spent on its own 2017 hedging program.[ix]
For all their complexity in detail, the President’s 2013 reforms were simple in their objective: open the oil industry to foreign businesses and private capital for the first time since 1938 to boost output, lower gasoline prices and imports, and shore up PEMEX’s balance sheet. In other words, President Enrique Peña Nieto hopes to transform Pemex from an arm of the state into a functional for-profit company capable of competing successfully outside of its heavily regulated domestic market.[x] Even before the oil price collapse of 2014, such reforms were considered imperative. After 2015, the reforms took on existential importance: PEMEX posted a $10.2 billion loss for the third quarter of 2015, the largest on record.[xi]
In the final days of 2016, Mexico began the transition from decades of government-set, subsidized gasoline prices by implementing experiential tariff zones in certain areas where prices were allowed to fluctuate with market conditions.[xii] This sent prices at the pump as much as 20% higher in some places, sparking days of national protest with more than 700 arrests and four deaths.[xiii] In a Bloomberg analysis of 60 countries, Mexico was found to have the greatest portion of personal incomes spent on fuel, so it is unsurprising that a poll found 99% of Mexican voters were opposed to the price hikes, or gasolinazo.[xiv]
In the President’s defense, PEMEX has been losing as much as $3 billion a year importing gasoline.[xv] With limited storage capacity and refining in decline, Mexican gasoline imports have surged in recent years.[xvi] Additionally, PEMEX’s six Mexican refineries have accumulated annual operating losses as high as $5 billion, which only exacerbates the need for these expensive imports.[xvii] But in going to international gasoline markets, PEMEX must often buy gasoline at competitive prices, only to sell it at home at a subsidized discount.
Public opinion aside, moving from state-controlled gasoline prices to a more liberalized market is finally yielding tangible results in 2017. British Petroleum (BP) announced it plans to open about 1,500 new gas stations in Mexico over the next 5 years, resulting in several hundred millions of dollars of investment.[xviii] Glencore has signed a deal with Mexican partners to manage 1,400 gas stations— more than 10% of the country’s total— in a joint venture called the G500 Network.[xix] Valero, the US refining behemoth, is preparing to dive into Mexico’s retail gasoline market with a $200 million investment in three storage and distribution facilities.[xx] PEMEX estimates that foreign players may provide up to $16 billion in such investments, shoring up infrastructure, increasing storage capacity, and improving gasoline access in rural communities.[xxi] Most importantly, competition should lower prices at the pump over the long-term for ordinary Mexicans and put PEMEX on better financial footing to become more competitive abroad.
Further upstream, the loosening of PEMEX’s monopoly is also yielding important —although not necessarily popular — benefits. In March, Italian oil major Eni was the first foreign player to report drilling an oil well in Mexico since the passage of the 2013 Energy Reform. Interestingly, after taking ownership of the shallow water block and conducting its own exploration, Eni believes there could be more than 800 million barrels there than previously estimated.[xxii] This anecdote serves to illustrate the kinds of gains Mexico could see as more critically important foreign expertise, technology, and capital find their way into the country.
Also, make no mistake: access to cutting edge technologies has never been more important in the oil industry, which is going through its own big data revolution. In April, BP discovered 200 million barrels of crude in the Gulf of Mexico thanks to a technological breakthrough involving algorithms and a 15,000 square-foot supercomputer.[xxiii] As such technologies become more mainstream, they could save deep-water drillers millions in avoided false starts and dry wells. Mexico cannot afford to be left behind by barring foreigners with the best technologies and knowledge from their waters. In this sense, the reforms are well-timed.
With help from foreign drillers, the International Energy Agency (IEA) projects that Mexico’s oil production should rise from about 2.4 million b/d in 2015 to some 3.4 million b/d by 2040, as output from deep-water fields and tight oil plays offsets declines in mature, onshore conventional fields.[xxiv] The IEA estimates Mexico is home to 16 billion barrels of recoverable deep-water oil, but says that their cost-effective extraction hinges on increased cooperation with foreign partners. PEMEX has little experience in deep-water production and the IEA estimates without the reforms of 2013, which permit PEMEX to cooperate with foreign interests, Mexican production would be about 1 million b/d lower by 2040. “The main source of future growth… is anticipated to come from deepwater fields. This is a new frontier for Mexico where PEMEX has less experience and where other players are anticipated, alone or in partnership with PEMEX, to play a prominent role,” writes the IEA.
None of this is lost on PEMEX. In March, it partnered with BHP Billiton to jointly pursue exploration of the Trion discovery, which should yield much-needed knowledge sharing in deep-water production. As the Trion discovery alone may require more than $11 billion to develop, PEMEX was probably wise to share its risks and costs with a foreign partner.[xxv]
Not all Mexicans view these developments sanguinely. In April, a mob of protesters set fire to a public building in the town of Tecpatan, furious that the government plans to auction off land in their farming community to private oil drillers. “With machetes, with pistols, with whatever necessary, we will defend our land,” said Elmer Escalante, a teacher. “Oil development here won’t mean jobs for us. But it will mean the ruin of our land,” he said. [xxvi] Such sentiment has helped propel left-leaning presidential contender Andres Manuel Lopez Obrador into the national spotlight. He has vowed, if elected, to revise the laws that opened the country’s energy markets to foreign investment and is leading in some opinion polls for Mexico’s 2018 presidential election.
Conversely, though President Enrique Peña Nieto is not allowed to run again for president in 2018, his prospects would be bleak if he were permitted. He has had the lowest approval rating of a Mexican President in decades.[xxvii] Even so, if IEA projections are to be believed, his energy reforms should ultimately enrich Mexico for generations to come. Speaking to an audience at Rice University’s Baker Institute in Houston, the CEO of PEMEX said that his company is on track to return to profitability by 2020.[xxviii] By bringing greater transparency and liberalization to Mexico’s energy markets the President has demonstrated laudable vision and his efforts parallel reforms underway in Saudi Arabia.
 There are many ways one could measure oil dependency. We define oil-dependent states as those nations exporting more than 1 million b/d with oil rents accounting for 1% or more of GDP. In 2015, these countries were Russia, Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, Nigeria, Mexico, Angola, Kazakhstan, Norway, Qatar, Algeria and Columbia, according to World Bank and CIA Factbook data. While World Bank data for Iran and Venezuela is lacking, they almost certainly belong on the list as well. Looking at GDP per capita, this list would suggest oil dependence in and of itself does not necessarily lead to either great national wealth or poverty. See The World Bank, “Oil Rents (% of GDP),” last accessed June 17, 2017, http://data.worldbank.org/indicator/NY.GDP.PETR.RT.ZS?end=2015&start=2010; also see Central Intelligence Agency, “The World Factbook: Crude Oil – Production,” last accessed June 17, 2017, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2241rank.html.
Seth Clare and Samer Mosis were classmates in the Johns Hopkins School of Advanced International Studies (SAIS) class of 2016 in Washington DC. At SAIS, Seth pursued a concentration in energy, resources, and the environment while Samer focused on international economics and the Middle East. They now work as senior commodity pricing specialists at S&P Global Platts in Houston. Prior to joining Platts, Seth, a student of Spanish, worked with the US Department of the Treasury, UCLA’s Resnick Program for Food Law and Policy, and the Israeli Ministry of Foreign Affairs. Samer, an Arabic-speaker, has spent time with the Lafayette Group, US Department of the Treasury, and Tahrir Institute for Middle East Policy.
*Source: PresidenciaMX 2012-2018 (https://commons.wikimedia.org/wiki/File:EPN._Promulgaci%C3%B3n_de_la_Reforma_Energ%C3%A9tica.jpg)
Licensed for use under the Creative Commons Attribution-Share Alike 3.0 Unported license: https://creativecommons.org/licenses/by-sa/3.0/legalcode
**The views and opinions expressed in this article are solely those of the authors, who are writing from the perspective of John Hopkins SAIS alumni and do not in any way represent the views of S&P Global Platts, its affiliates and/or any of its employees.
[i] Daniel Lombroso, Alice Roth, and Uri Friedman, “Is Trump a Populist Authoritarian?,” The Atlantic, February 3, 2017, https://www.theatlantic.com/video/index/515610/is-trump-a-populist-authoritarian/; Adam Nossiter, “Marine Le Pen Echoes Trump’s Bleak Populism in French Campaign Kickoff,” New York Times, February 5, 2017, https://www.nytimes.com/2017/02/05/world/europe/marine-le-pen-trump-populism-france-election.html?_r=1; and Devin T. Stewart and Jeffrey Wasserstrom, “The Global Populist Surge Is More than Just a Western Story,” The Guardian, December 10, 2016, http://thediplomat.com/2016/12/the-global-populist-surge-is-more-than-just-a-western-story-just-look-at-asia/.
[ii] The Economist Explains, “What is populism?” The Economist, December 19, 2016, http://www.economist.com/blogs/economist-explains/2016/12/economist-explains-18.
[iii] All figures in this article are denominated in US dollars.
[iv] David Blackmon, “Mexico’s Complex History With Foreign Oil Investment,” Forbes, August 13, 2013, https://www.forbes.com/sites/davidblackmon/2013/08/13/mexicos-complex-history-with-foreign-oil-investment/#5f265ce530f3.
[v] Dolia Estevez, “Most Mexicans Oppose President Peña Nieto’s Plans To Open Up Pemex To Private Investment,” Forbes, June 26, 2013, https://www.forbes.com/sites/doliaestevez/2013/06/26/most-mexicans-oppose-president-pena-nietos-plans-to-open-up-pemex-to-private-investment/#50e09e181a4b.
[vi] The US Energy Information Administration, “Country Analysis Brief: Mexico,” December 8, 2016,
[vii] The International Monetary Fund, “Mexico 2016 Article IV Consultation,” IMF Country Report No. 16/359, November 2016, https://www.imf.org/external/pubs/ft/scr/2016/cr16359.pdf.
[viii] Javier Blas, “Uncovering the Secret History of Wall Street’s Largest Oil Trade,” Bloomberg Markets, April 3, 2017, https://www.bloomberg.com/news/features/2017-04-04/uncovering-the-secret-history-of-wall-street-s-largest-oil-trade.
[ix] Jude Webber, “Mexico’s Pemex spends $134m in first-ever oil hedging programme,” Financial Times, April 25, 2017, https://www.ft.com/content/d5067eff-cf5a-3beb-8079-3fd6be5f929e.
[x] Adam Williams, “Pemex, Mexico’s state oil giant, braces for a the country’s new energy landscape,” Washington Post, June 7, 2014, https://www.washingtonpost.com/business/pemex-mexicos-state-oil-giant-braces-for-a-the-countrys-new-energy-landscape/2014/06/04/07d171d6-ea69-11e3-93d2-edd4be1f5d9e_story.html?utm_term=.005fb50ea33d.
[xi] Adam Williams and Andrea Navarro, “Pemex Reports Biggest Loss Ever,” Bloomberg, October 28, 2015, https://www.bloomberg.com/news/articles/2015-10-28/pemex-reports-12th-straight-loss-as-oil-price-batters-profits.
[xii] Maria Verza, “Weaknesses in Mexico’s oil sector are creating ‘chaos’ during the holiday season,” Business Insider, December 31, 2016, http://www.businessinsider.com/ap-long-gas-lines-price-hike-mar-holiday-season-in-mexico-2016-12.
[xiii] Carrie Kahn, “In Mexico, Why Gas Prices Are Up And The Peso Is Down,” NPR, January 4, 2017, http://www.npr.org/2017/01/04/508151245/in-mexico-why-gas-prices-are-up-and-the-peso-is-down; Associated Press, “Looting, protests in Mexico over gas price hikes turn deadly,” CNBC, January 6, 2017, http://www.cnbc.com/2017/01/06/looting-protests-in-mexico-over-gas-price-hikes-turn-deadly.html.
[xiv] Kate Linthicum, “Protests ignited by gasoline price hikes continue to roil Mexico,” Los Angeles Times, January 9, 2017, http://www.latimes.com/world/mexico-americas/la-fg-mexico-gas-protest-20170109-story.html; Tom Randall, Alex McIntyre and Jeremy Scott Diamond, “Gasoline Prices Around the World,” Bloomberg, April 19, 2017, https://www.bloomberg.com/graphics/gas-prices/#20171:United-States:USD:g.
[xv] Christopher Woody and Reuters, “Mexico says gasoline prices to rise as much as 20.1% in January,” Business Insider, December 27, 2016, http://www.businessinsider.com/r-mexico-says-gasoline-prices-to-rise-as-much-as-201-percent-in-january-2016-12.
[xvi] Joshua Brown and Beth Brown, “US gasoline exports to Mexico hit record high on refinery issues, strong demand,” S&P Global Platts, December 30, 2016, https://www.platts.com/latest-news/oil/houston/us-gasoline-exports-to-mexico-hit-record-high-21476305.
[xvii] Jessica Resnick-Ault and David Alire Garcia, “Pemex seeks investors for its refineries, but who’s buying?” Reuters, May 6, 2017, http://www.reuters.com/article/us-mexico-refineries-sales-idUSKBN1810JT.
[xviii] David Alire Garcia, “BP plans entry into Mexico’s once-closed retail gasoline market,” Yahoo Finance, March 9, 2017, https://finance.yahoo.com/news/bp-plans-entry-mexicos-once-230628865.html.
[xix] Glencore, “Glencore announces joint venture with G500 in Mexico,” May 18, 2017, http://www.glencore.com/media/news/p/glencore-announces-joint-venture-with-g500-in-mexico.
[xx] “Major US refinery firm is heading for Mexico,” Mexico News Daily, May 19, 2017, http://mexiconewsdaily.com/news/major-us-refinery-firm-is-heading-for-mexico/.
[xxi] Elena Toledo, “Liberalizing Mexican Oil Industry Will Attract $16 Billion in Investment,” PanAm Post, December 21, 2016, https://panampost.com/elena-toledo/2016/12/21/liberalizing-mexican-oil-industry-will-attract-16-billion-investment/.
[xxii] Stephen Jewkes, “Eni CEO Says Mexico Oil Find Likely Bigger Than Estimates,” Rig Zone, March 29, 2017, http://www.rigzone.com/news/oil_gas/a/149014/Eni_CEO_Says_Mexico_Oil_Find_Likely_Bigger_Than_Estimates.
[xxiii] David Hunn, “BP finds trove of oil in Gulf of Mexico using new subsea imaging,” Houston Chronicle, April 27, 2017, http://www.houstonchronicle.com/business/energy/article/BP-finds-hidden-trove-of-oil-in-Gulf-of-Mexico-11103164.php.
[xxiv] The International Energy Agency, “Mexico Energy Outlook,” World Energy Outlook Special Report, 2016, https://www.iea.org/publications/freepublications/publication/MexicoEnergyOutlook.pdf.
[xxv] Annette Hugh, “Mexican energy reform has stabilized Pemex finances: CEO,” S&P Global Platts, May 4, 2017, https://www.platts.com/latest-news/oil/houston/mexican-energy-reform-has-stabilized-pemex-finances-26728037.
[xxvi] Adam Williams, “Mexico’s guerrilla country up in arms as oil drillers move in,” World Oil, March 28, 2017, http://www.worldoil.com/news/2017/3/28/mexicos-guerrilla-country-up-in-arms-as-oil-drillers-move-in.
[xxvii] David Alire Garcia, “Mexican president’s approval rating drops to record low amid scandals,” Reuters, April 13, 2016, http://www.reuters.com/article/us-mexico-president-poll-idUSKCN0XA1RX.
[xxviii] Annette Hugh, “Mexican energy reform has stabilized Pemex finances: CEO,” S&P Global Platts, May 4, 2017, https://www.platts.com/latest-news/oil/houston/mexican-energy-reform-has-stabilized-pemex-finances-26728037.