Mexico’s Energy Reform: A Profit Wave 75 Years in the Making

Rudy Martin

Few topics intensify a discussion faster than Mexican immigration. The governor of one of our largest states has proposed a novel take on the topic.

Texas Gov. Rick Perry brought up the perennially controversial subject of additional border security measures at the Republican Governors Association meeting in Arizona.

Here’s the twist: Gov. Perry says Mexico may need to keep Americans out.

That’s because "there might be a lot of folks who maybe are U.S. citizens going to Mexico looking for jobs in the energy industry."

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Internal Sponsorship

Gov. Perry’s seemingly convoluted assessment followed Mexican President Enrique Pena Nieto’s initiatives to reform his nation’s energy industry.

Perry opined that the traditional debate over immigration could become "part of the past … and one of the reasons is that when Mexico liberalizes its energy policy, the Mexicans who are here illegally will go home."

Texas Gov. Rick Perry suggests more people may want to enter Mexico than leave it

The Texas governor’s tongue-in-cheek assessment is undoubtedly an exaggeration.

He’s right, however, that political and economic events south of the U.S. border could attract foreign petroleum workers, Mexican expatriates and profit-seeking investors.

Mexico is right now unlocking a 75-year-old monopoly held by government-owned Petroleos Mexicanos ("Pemex"). The country’s new president is aggressively pushing major reforms in taxes, labor laws, education and telecommunications.

A Profit Wave 75 Years in the Making

Pemex lacks the skills, resources and financing to exploit Mexico’s abundant onshore and offshore hydrocarbon deposits. Letting non-Mexican petroleum giants like ExxonMobil (XOM) and BP Corp. (BP) participate in the effort should boost petroleum output, helping the government’s finances as well as employment.

"This is a watershed moment for Mexico," said Lisa Schineller, an analyst with Standard & Poor’s ratings division, which recently upgraded Mexico’s credit rating. Schineller thinks "tapping into Mexico’s vast oil potential should energize investment and growth throughout the economy."

While Mexico’s energy sector will be the biggest and most-visible beneficiary, the new reform efforts will likely lift most sectors of the nation’s economy.

The energy reforms alone could revive Mexico’s economy this year and establish future GDP growth in the 4%-to-5% range, according to administration figures.

This year, Mexico’s economy should expand 3.9% following a muted 1.2% expansion rate in 2013, according to Credito y Caucion, an insurance subsidiary of multinational Grupo Atradius.

3 Reasons to be Bullish on

Mexico’s Energy Sector

Mexico’s proximity to the huge U.S. consumer market gives the country ready customers for its industrial output. The North American Free Trade Agreement opens the door to customers to the north.

Many of those neighbors are bullish on Mexico’s prospects.

"Mexico has a world-class manufacturing sector, and NAFTA has certainly helped bring this industry up to the highest global standards," said economist Pia Orrenius of the Dallas Federal Reserve Bank. "Mexico has a more stable macro economy with relatively low rates of inflation and a strong peso that has held its value consistently for well over a decade."

• "If Mexico is able to make its legislative changes stick and harness its geostrategic potential, the country will excel over the next five years, benefiting its people and making it a good bet for investors," is the opinion of Shannon K. O’Neil, senior fellow at the Council on Foreign Relations.

Experience with cutting-edge manufacturing techniques is helping inspire firms from aircraft manufacturer Bombardier to auto producers Honda, Nissan and Volkswagen to locate new plants in Mexico.

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I believe we will see many more such opportunities in Mexico as 2014 unfolds. The future down south looks brighter than ever.

Happy Trading!

Rudy

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