The standard view among experts in world energy markets for at least a half-century has been that demand for oil and other non-renewable energy sources such as coal and natural gas would continue to rise as supplies inevitably declined, eventually culminating in an worldwide energy crisis, political disruption, and even wars.
Books have been written about this as well as countless essays and white papers, and only god knows how many survival shelters have been built by mulleted hillbillies in anticipation of the coming collapse.
But then something funny happened on the way to the apocalypse. Back on June 16, 2013, in Germany, of all places. It was a sunny, windy Sunday. Wind and solar farms were almost literally bursting with energy and the grid was in danger of overloading.
Free renewable energy, of course, had priority and grid managers had to make a decision. Energy market prices went briefly negative. So brown coal energy producers, instead of selling their power, had to pay the grid managers to take their electricity. It was an ominous portent.
This anomaly was reported in The Economist, but nobody paid much attention. Crude was selling at US $98 a barrel, a near record high. Investment in non-traditional energy extraction in the U.S. and Canada, such as fracking and exploitation of shale fields, was pouring in.
Energy independence! A new energy economy! Jobs! Prosperity!
Irrational exuberance, as it turns out.
Oil prices are now hovering between US $30 and $45 per barrel. Bankruptcies and bad loans among American and Canadian upstart energy producers are mounting, hundreds of billions of dollars in new investment have been erased, and the Dakotas are looking more and more like a wasteland of rusting rigs and broken dreams.
Renewable green energy production worldwide finally got its footing, shale field production in the U.S. grew almost exponentially, Iraqi oil output expanded to record highs, Iran returned to the global oil market after sanctions were lifted and, most recently, the Saudis, who can produce oil at a cost of US $3 per barrel, have rejected an agreement to freeze production levels in the hope of punishing competitors like the U.S. and Iran while weathering the storm (a perfect storm, as it turns out).
We are living in a post-petroleum era. The game has changed, and despite taking a hit, Mexico is poised not only ride out the storm, but surf the waves.
Yes, Mexico’s economy has traditionally depended on oil production as a major source of revenue. But that is only one cylinder of a six-cylinder engine (an imperfect analogy, but bear with me). There’s also increasing manufacturing, tourism, services, remittances and, of course, the black market drug trade.
The fuel injector, if you will, on that first cylinder isn’t working at capacity, but the others will keep the engine plugging along at a rate of 3% GDP growth per year – not too shabby, even in the best of circumstances.
Other less diverse Latin American economies that depend disproportionately on oil revenue, such as Brazil and Venezuela, by comparison, are in freefall and widespread civil unrest is becoming an increasing problem.
Yes, Mexico took a punch on the kisser, to be sure, but it then parried, didn’t panic and caught its breath. The value of the peso plummeted, but the current Mexican administration acted responsibly and prudently. It slashed public spending and initiated a package of measures to ameliorate the peso’s decline.
It worked. The peso has stabilized, inflation is well below GDP growth, and the economy continues to power through the gears of the global economic transmission.
Since writing “Mexico: rising sun of the Americas” a year ago, I’ve had reasons to doubt my sanguine conclusions and analysis, as a lot of negative news has eclipsed the pockets of good things happening.
But having reread that piece, and analyzed Mexico’s response to the end of the oil era, I remain convinced that the fundamentals remain in place for Mexico to not only survive, but also thrive, in an increasingly volatile global economy.
Glen Olives Thompson is a professor of North American Law at La Salle University in Chihuahua, a specialist in law and public policy and a regular contributor to Mexico News Daily. Some of his other non-academic work can be viewed at glenolives.com.