The Economist: Andrés Manuel López Obrador’s energy policy will harm Mexico

Mexico’s president takes many of his ideas from the 1960s and 1970s. Back then, Mexico had yet to embrace economic liberalization or democracy, and state-owned energy companies dominated the economy. As a young politician, Andrés Manuel López Obrador watched Pemex, the oil giant created by the nationalization of private companies in the 1930s, spread largesse across his home state of Tabasco. Mexico has changed a lot since those days, just like the energy business. López Obrador’s thought has not done it.

Since taking office in 2018, López Obrador has repeatedly tried to recreate that antiquated model of state-directed, fossil fuel-powered energy. It has injected public money to build a refinery in Tabasco, at a cost of at least US$8 billion, and to prop up troubled Pemex. His latest attempt to turn back the clock is a constitutional amendment that, if approved, will return control of the electricity market to the state power company, CFE. It would be a disaster for the country.

Mexico opened up its oil and energy industries tentatively in the 1990s and then more boldly in the 2000s, revenue that, without private investment, could neither sustain its oil production nor provide adequate and affordable energy. A series of presidents tried to liberalize energy markets; López Obrador’s predecessor, Enrique Peña Nieto, finally pulled it off. Lawmakers from both the ruling party and the main opposition voted for the change.

The reforms worked. Electricity became cheaper for those companies that could buy on the open market. Pemex benefited from external experience in exploiting its reserves. Cheaper energy, in turn, helped Mexico’s manufacturers prosper. This meant that the economy and the government were no longer dependent on oil revenues. Better yet, renewable energy companies, like tourists on Cancun’s beaches, huddled together to soak up Mexico’s plentiful sun. They also came to harvest their wind. A country saturated with hydrocarbons joined the global shift towards clean energy.

López Obrador’s plan is designed to reverse these successes, after the courts rejected earlier attempts. He says that strengthening CFE and Pemex would benefit the Mexican people. It’s hard to see how. If the bill passes, energy will cost more. It will also be dirtier, as CFE-generated electricity will take precedence over the much cheaper and greener stuff produced mostly by private companies. Independent regulators will be eliminated. Private generators will no longer be able to sell energy directly to large consumers, but only to CFE, on their terms.

All of this would lead to large price increases or a drain on public coffers. It is almost certain that Mexico would miss its climate change goals. His credibility with investors would also suffer, as many energy contracts would be cancelled.

The repercussions would be felt throughout the economy. Multinational manufacturers, lured by Mexico’s trade agreement with the United States and Canada, would at least face higher energy bills, threatening the profitability of some operations. Others have committed to reducing their greenhouse gas emissions; running a factory using energy produced by burning dirty fuel oil would not help with that. And the sense that the rules in Mexico can change at the whim of the president will do little to attract investors who are already skeptical that a left-wing populist will treat them fairly or predictably.

All of this comes at a time when Mexico is emerging from its biggest economic contraction since the Depression. The country needs all the investment it can get. It should be seizing the great opportunity presented by the US’s disengagement from its great East Asian rival. Many companies serving American customers are looking to shorten their supply chains and reduce their reliance on China. Mexico could attract many of those companies, but only if the president doesn’t scare them off.

López Obrador’s proposals are also legally dubious. Lawyers believe the bill violates trade agreements, including the one with the United States, on which much of Mexico’s manufacturing is based. The annulment of contracts will raise complicated legal questions about compensation.

And if López Obrador manages to abolish two independent energy regulators, he is likely to step up his attacks on institutions he does not already control. These attacks could even be focused on the body that administers Mexico’s elections, a frequent target of his. It seems that the president’s conception of the state is also mired in the 1970s, when Mexico was governed by a single party and the executive faced no significant checks on its power.

Mexico’s Congress should vote against his proposals, which will be debated from January 17. Beyond that, though, lawmakers should try to curb both the president’s nationalist tendencies, which will endure long after this bill, and his attempts to undermine the rule of law.