Oil is not the driver it once was Oil is not the driver it once was. fox news

Mexico on right track in post-petroleum era

Successful government policies will enable Mexico to ride out the storm

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.

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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.

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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.

What happened?

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

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  • Peter Maiz

    Now if Mexico could only foster “rule of law”, literally an impossibility in a country that rules itself with privileged power brokers and veiled impunity, then Mexico could and would become part of the “first world”. El ” imperio de la ley” has never existed in Mexico partially because Spain never really experienced the changes of the French Enlightenment,

  • Edward

    With respect, have you factored in the debt bomb that is ticking?

  • Güerito

    I have to admit I was pleasantly surprised by the latest (preliminary) economic figures, showing 2.7% growth during the first quarter of 2016 for Mexico. It’s one of the few times in the last several years the forecasts were roughly correct. Let’s hope the figures can get up to and above the 3% figure.

    Glen, I’m glad you mentioned remittances as one of the “six cylinders.” Bloomberg reported one of the big factors in the 2.7% uptick was increased consumer spending due to low inflation and increased remittances.

    It’s kinda odd, because remittances are now worth more due to the weakened peso, but inflation remains very low. Let’s hope this curious state of affairs can continue.

    http://www.bloomberg.com/news/articles/2016-04-29/mexico-gdp-growth-beats-forecasts-as-services-sector-lends-boost

  • PintorEnMexico

    I lived two years in Venezuela when gas was 19 cents per gallon. The country was flush with petro dollars, but I could see that they were doing nothing to diversify. So many people looked at Chavez as an enemy equal to Castro, but given our history of latin american intervention, I was content to watch Venezulanos live or die by their vote. Chavez had a great time while oil was up, while his successor is left holding the bag. They could have easily invested in wind, hydro, and solar. Now they have one power source, a reservoir which is in danger of drying up, largely due to the effects of their one exportable commodity. Once the water level drops below the generators, the country will go dark…

  • Michael Alt

    Mexican central banc is selling millions of USDollars,borrowed from IMF, to buy pesos, to reduce pesos in circulation and
    support the peso. They just raised interest rates 0.50% recently after a 0.25% raise following the US Fed’s quarter point raise in Dec. 2015. This is a monetary tightening cycle which we all know leads to economic contraction. Please, only change the amount of pesos you need for the short or intermediate term. We’ve seen this movie before. It dosent have a happy ending.

  • John Binder

    What does electricity produced by wind and solar have to do with the price of oil? Oil isn’t used much for the production of electricity so they aren’t really competing. If you are thinking electric vehicles that’s still a small percentage of vehicles and can’t account for the current price of oil, and also wind and solar is still only a small percentage of electric production. Also of note resident in countries with large investments in wind and solar usually pay more for electricity overall which is a deterrent to switching to Electric Vehicles. Your views on the subject are rather skewed.

    As for Mexico’s financial situation it’s very reliant on the US. If the US were to drastically change it’s laws things could change quit a bit. I’m not sure how likely that is with all the support for Mexico in the US, but still something to think about I guess.

    • Glen Olives

      Skewed? No, not really. Oil, gas, coal, and other non-renewables are used heavily in energy production. Or at least they were. True, heavily subsidized clean renewable energy countries pay an initial price in higher energy costs (generally), but those prices are coming down, as is inevitable as this energy sector gains purchase. Falling oil prices, nonetheless, as you intimate, have less to do with other energy technologies and more to do with a global oil glut — but these two causal factors cannot be separated. They compliment one another. And I can’t see how this will suddenly end.

  • Güerito

    Mexicans grow impatient with Peña Nieto as violence flares –

    President’s popularity languishes as progress stalls on reforms

    “Young and debonair, Enrique Peña Nieto was the fresh face of a tarnished old party when he became Mexico’s president.

    In his first two years he pushed through ambitious reforms in energy and telecommunications, the financial sector and education, designed to unleash investment, boost competition and power growth.

    But three and a half years after his election, the economy is stubbornly tepid, while scandals and rising violence have helped knock 9 percentage points off Mr Peña Nieto’s popularity rating so far this year….

    Mr Peña Nieto was unlucky that tenders to open the energy sector that had been expected to draw billions of dollars in investment coincided with the global oil price crash. But the IMF forecasts that net foreign direct investment inflows will amount to only 1.6 per cent of Mexico’s gross domestic product this year, well below the 4.6 per cent Brazil saw in the 12 months to March, according to Goldman Sachs, even though Brazil is facing its worst recession in a century.

    While first-quarter economic growth accelerated to 2.9 per cent, (very large) government spending cuts and the weak peso have fuelled fears it cannot last. Consumer confidence in April slumped to its lowest level since August 2014….”

    https://next.ft.com/content/c4f87076-1027-11e6-bb40-c30e3bfcf63b

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