Energy Is the Model For U.S.-Mexico Cooperation

Energy Is the Model For U.S.-Mexico Cooperation
AP Photo/Rebecca Blackwell

Fresh off a visit to Europe to discuss global hot spots with G-20 partners, U.S. Secretary of State Rex Tillerson is now attending to another important relationship simmering much closer to home. 

His meetings this week with Mexican President Enrique Pena Nieto and his cabinet, alongside U.S. Homeland Security Secretary John Kelly, spanned a broad agenda from border security to law enforcement to trade. The latter has certainly galvanized public sentiments on both sides of the border. Feisty rhetoric of walls, tariffs and win-lose trade deals risk driving a wedge in the bilateral relationship.

Tillerson was tapped to be America’s top diplomat in large part for his acumen working with foreign governments to advance strategic interests and establish long-term commercial ties – experience honed while heading one of the world’s largest energy companies. Those same skills will be needed as the U.S. reevaluates its trade relations with Mexico.

Change of some sort is likely and implementing it is bound to be complex. While discussions will necessarily drill down to the brass tacks, it is important to keep in mind a top line message that the U.S. and Mexico have and will continue to gain from their interconnected economies.

Fittingly, Tillerson’s former industry epitomizes the type of deep economic integration between the U.S. and Mexico that businesses in both countries are keen to preserve. If you’re searching for common ground to defend economic openness in a future trade agreement, look no further than the mutual gains from the U.S. and Mexico’s interconnected energy trade.

Energy is indelibly an industry based on trade. The free movement of labor, equipment, and commodities allow for resources in one country to be put to productive use in another.

This interaction is firmly embedded between the U.S. and Mexico. Every day, Mexico exports roughly 688,000 barrels of crude oil to the U.S. The U.S., meanwhile, sends a similar volume of refined petroleum products to Mexico each day. Approximately half of Mexico’s gasoline imports come from the U.S.

The linkages are further entrenched when it comes to natural gas. The U.S. exports about 3 billion cubic feet per day (bcf/d) of natural gas to Mexico. These flows are mainly one-way from the U.S. to Mexico, but absent a southern outlet, the glut of supply would put downward pressure on U.S. natural gas prices and hurt domestic producers.

The industry that goes into Mexican bi-lateral energy trade is also a major source of jobs in the U.S. In Texas, the nation’s top hydrocarbon-producing state, the oil and gas industry is responsible for nearly two million jobs, according to data from the American Petroleum Institute. In Pennsylvania, the second largest natural gas-producing state, the industry accounts for almost 340,000 jobs.

But it’s future planning that reveals just how tightly interdependent the U.S. and Mexico are on the energy front.

Mexico is banking on the sustained boom in U.S. shale gas production for its energy infrastructure expansions. Over the past five years, natural gas pipeline capacity between the U.S. and Mexico has nearly doubled from approximately 3.7 bcf/d in 2011 to 7.2 bcf/d in 2016, according to the U.S. Energy Information Agency. That capacity is expected to again double by 2018 to more than 14 bcf/d.

In turn, Mexico is expanding its domestic pipeline network to accommodate greater U.S. natural gas based on its energy ministry’s current five-year plan. Some 3,300 miles of new gas pipelines are planned or under construction in Mexico, mainly to support its power sector.

Likewise, U.S. companies have placed long-term bets on developing natural resources in Mexico. U.S. oil majors ExxonMobil and Chevron were among the international investors who paid large sums in December to lease acreage in Mexico’s deepwater portion of the Gulf of Mexico. Those investments came despite the sustained slump in oil prices that has tightened budgets across the entire global energy industry.

Their long-term commitments are capitalizing on Mexico’s historic reforms to liberalize its energy industry and other key sectors of its economy. Mexico’s national hydrocarbons agency is currently finalizing rules to auction off unconventional gas blocks, a process that could garner interest from similar mid-sized operators that unleashed the shale revolution in the U.S. Whether deepwater or onshore, the ability to develop energy resources cost-efficiently depends partially on the competitive pricing of goods and services that are traded across the border.

The energy industry is uniquely dependent on trade. Investments must be made where the resources are located. Goods and services must then flow to develop them. In this regard, the energy supplies and demands of the U.S. and Mexico have benefitted each other enormously. But the same principles of open economies for efficient resource management can be also applied to any number of industries.

Revisions to U.S.-Mexico trade relations will necessarily veer towards the technical if and when they arise. Potential negotiations would be well-served if they are underpinned from the start by visions of integration and opportunities rather than deficits and losses. The energy industry is an obvious pillar for future economic cooperation. 

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