Mexico’s Populist New President Unlikely to Derail Energy Reform

Andrés Manuel López Obrador won’t dismantle Mexican energy reforms, despite his years of vehement opposition to opening the country’s oil patch to foreign investment and his bigger-than-expected win in Sunday’s general elections.

Instead, Mexico’s next president will likely preserve what’s already been achieved in the historic opening of the country’s long-closed oil sector, while slow-walking any effort to throw open more of the coastline to international investors.

That belated dose of pragmatism for López Obrador is good news for Mexico over the near term — but it could mean falling Mexican oil production over the long run.

“It has been impressed upon him by his team that it would be politically very damaging to try to reverse the reform at this point in time,” said Duncan Wood, director of the Mexico Institute at the Wilson Center.

He said López Obrador, known widely as AMLO, will likely protect the nearly $200 billion in foreign investment already committed but won’t offer any new oil-exploration concessions, because those would take years to develop and would only benefit the next president.

“At the very least, there will be a temporary halt to the energy reform. Of course, that will delay the full benefits of the reform, but that won’t be felt for 10 years time,” Wood said.

López Obrador made opposition to Mexico’s historic 2013 opening of its oil industry the centerpiece of his previous run for president. Seeing himself as the political heir to giants of the Mexican revolution — especially Lázaro Cárdenas, who famously nationalized Mexico’s oil industry in 1938 — López Obrador has long advocated a nationalist approach to the country’s economic development and its abundant natural resources.

Outgoing President Enrique Peña Nieto — Mexican presidents serve a single, six-year term — launched the ambitious energy reform upon taking office to reverse years of decline in the Mexican oil patch. Since that 1938 nationalization, the state-owned oil company took sole charge of developing Mexico’s oil resources — with increasingly disappointing results of late. Mexican production fell from more than 3 million barrels a day in the mid-2000s to 2.6 million barrels by 2010.

In a bid to reverse that decline, Mexico sought to attract international oil companies with capital and technological know-how, a move that required rewriting Mexican law to allow foreign firms to drill for oil.

While it has yet to reverse the fall in Mexican oil production, the opening has by all accounts been successful. More than 70 different firms from a score of countries have committed to investing at least $180 billion in oil exploration projects. Crucially for Mexico, the state will pocket a big share of the revenues generated by that new production.

During the campaign, López Obrador and his advisors moderated his once-fiery denunciations of the energy reform. In his victory speech on Sunday, he made only a single cautious reference to the energy reform, promising to review oil contracts that have already been awarded to ensure that they are legal and transparent. Crucially, noted Wood, López Obrador promised to respect due process and refer any disputes to international tribunals, guaranteeing the rights of foreign investors.

“We won’t act in an arbitrary fashion, nor will there be confiscation or any expropriation,” the president-elect said Sunday night.

Only a few years ago, López Obrador tried to launch a national referendum to scupper the energy reform. What transformed him into a cautious defender of the status quo?

On one hand, the energy reform is deeply embedded in Mexican law, including the Constitution, making it difficult (though not impossible) for the new president to reverse it.

Perhaps more importantly, the economic factors that made the reform necessary in the first place are still there, notes Francisco Monaldi, an expert in Latin American energy at Rice University’s Baker Institute.

The state-owned firm, Petróleos Mexicanos, cannot reinvigorate Mexican oil and natural gas production on its own, and the country needs foreign investment in order to reverse the decline in one of its most important economic sectors, especially in the all-important deep-water fields in the Gulf of Mexico.

“I think [López Obrador] is totally opposed to the reform, but he has very powerful reasons to be pragmatic,” Monaldi said via email, comparing the president-elect’s deeply felt views on the energy sector to U.S. President Donald Trump’s views on trade. “Economic and oil-sector realities will, I think, impose pragmatism,” he added.

Of course there is still a risk, Monaldi noted, that López Obrador’s moderate campaign discourse could give way to a truly populist economic policy, the same way that initial moderation by leaders such as Hugo Chávez in Venezuela, Cristina Fernández de Kirchner in Argentina, and Luiz Inácio Lula da Silva in Brazil gave way to radicalism.

“His campaign moderation might not mean much,” Monaldi said.

One reason to expect a moderate approach to the energy reform is López Obrador’s broader economic objective. Any steps to abrogate existing oil contracts would spook foreign investors across all industries — with negative consequences for economic growth and employment.

“He wants a stable and prosperous Mexican economy,” Wood. said “If he reversed those oil contracts, it would send exactly the wrong signal across the economy, and that would be an economic disaster for him.”