North America's Energy Bonanza

Now is the time for the U.S., Canada, and Mexico to make real progress toward an interdependent energy market that will boost trade between all three

Action taken by Mexico to open its energy sector late last year offered a dramatic and impressive capstone to a year of intensive reform efforts under President Enrique Peña Nieto. As a political achievement, the vote was groundbreaking and historic, overturning 75 years of energy sector protectionism launched in 1938 by iconic Institutional Revolutionary Party (PRI) leader Lazaro Cardenas. But the real story in Mexican energy reform is economic; not just for Mexico, but for North America as well.

The Peña Nieto Administration estimates that energy reforms will add a full percentage point of growth to annual GDP by 2018. Essentially, this is “found money.” Once reforms are implemented, investment will increase significantly, perhaps as high as $15 billion per year according to some estimates. Much of this will be in the form of technology and infrastructure inputs, particularly in the onshore shale gas and the deep water drilling sectors, where Mexico currently lacks technology and expertise. The application of best practices will ensure efficient market development while also limiting the potential negative impact on the environment that enhanced energy sector development might otherwise cause.

In addition, as a result of our own energy revolution, the United States is experiencing increased investment in energy and the increasing supplies that will follow will have an important impact on the desire of manufacturers to set up or expand operations in Mexico. Prior to the energy reforms, observers had already noted a trend of companies moving out of China and other Asian locations to site in Mexico, taking advantage of proximity to the world’s largest market as well as a growing pool of highly qualified workers. A reduction in the cost of energy as a manufacturing input will drive Mexican competitiveness and make the country an even more attractive investment destination.

Winning Hand

This means significant opportunity for North America. Twenty years after NAFTA went into force, our three nations no longer merely trade products with each other. Now, we design and make them together. Joint production and supply chains have developed so that national borders no longer define production. North America itself is the commercial platform.

This is hugely important because, according to the National Bureau of Economic Research, every dollar of U.S. imports from Mexico includes 40 percent of U.S. content, while imports from China include barely 10 percent of that. With reduced energy costs, it is safe to assume that broad investment in Mexico will increase, driving bilateral trade with the U.S. The same is true with Canada, albeit to a lesser extent.

Now is therefore the time for the three North American governments to focus on coordinated energy policies. Left out of the original NAFTA due to Mexico’s nationalist sensitivities, changes in the sector have made the existing approach to coordination inefficient and perhaps unsustainable. A fully integrated North American energy market would improve efficiencies, reduce costs, and build an even more competitive region. Coordinated policies would also support regional initiatives to combat global climate change. Regulations can be harmonized, power grids linked more effectively, and cross border coordination developed. For its part, the United States has already taken far too long in approving the Trans-Boundary Hydrocarbons agreement with Mexico for the Gulf. Similarly, approval of the XL Keystone pipeline with Canada is long overdue.

It’s not an exaggeration to say that the application of new technology to the energy sector, opening up vast new previously unrecoverable resources, constitutes a revolution. After decades of business and policy decisions based on the assumption of energy scarcity, the United States now finds itself with energy so abundant that pressure is building on Washington to allow exports. Canada’s oil sands are the world’s second largest reserves after Saudi Arabia. And reforms in Mexico mean that oil and gas production there could double in a relatively short time. From energy scarcity, North America has moved to energy abundance virtually overnight.

History and geography have dealt North America a winning energy hand. Now it’s up to the three governments to play it.