President Joe Biden will set in motion an ambitious plan to achieve net zero greenhouse gas emissions in the year 2050. In observance of the Paris Climate Agreement, many other governments and also major global corporations are actively pursuing the same goal. China, which until now has been addicted to coal, intends to achieve peak emissions in year 2030 and to be carbón neutral in 2060.
Even the International Energy Agency, which until recently was pro-oil, has given up on its thesis that the exploitation of fossil fuels will be the main future source of energy and is readying a report called “World Roadmap to Net Zero by 2050”: The message is: health and the planet do matter.
These initiatives are the beginning of the end for the oil industry, which will disappear –state-run Petróleos Mexicanos (Pemex) included– almost completely in less than 30 years. The big drop in costs of solar and wind energy, in addition to battery storage in synergy with electric vehicles, ensures that the substitution of fossil energy by renewable energy will be a realistic prospect. Net zero emissions implies almost zero oil.
Just consider. A single 12-megawatt turbine is in the evaluation stage in the Netherlands. Seven thousand such turbines would provide enough energy to meet all of Mexico’s demand for electricity. European countries have set dates between 2025 and 2040 to electrify all of their vehicles and eliminate gasoline. Progress, with exponential innovation, is being made in the development of hydrogen as a fuel of the future, displacing gas and oil.
What about Mexico? President Andrés Manuel López Obrador, Energy minister Rocío Nahle, as well as Manuel Bartlett, the head of state electricity company CFE, and their anachronic entourage have defined an agenda based on systematic violation of the Constitution, trade agreements, laws and regulations, to push Mexico back to an energy model such as existed in the 20th century. Their attitude goes against the national interest, to say the least.
Oil’s decline has begun and its economic viability is in doubt. In the short term, the price of oil, like that of most risk assets, is slightly inflated due to easy monetary policies and dollar devaluation. But it is still low in historic terms and it will be difficult for it to remain above 50 dollars per barrel without causing an increase in supply, given that Saudi Arabia’s production cost is 10 dollars and that of U.S. frackers is 30 dollars.
The outlook for oil has changed. In the case of Pemex, its best oilfields have already been depleted. It lacks sufficient budget and its business plan oriented towards producing more oil is unrealistic. Unexploited reserves may now remain in the ground. It is a bad bet.
López Obrador’s government will enter into conflict with Biden’s in two regards, firstly, because it promotes dirty fossil fuels and, secondly, because Biden will support U.S. companies’ claims that their energy investments in Mexico are being thwarted arbitrarily. Biden will have to push Mexico to comply with its obligations under USMCA, which guarantee competition and regulatory certainty. It should, moreover, be beneficial to Pemex and to CFE, if there were synergies and cooperation with the private sector.
Biden wants the United States to be a leader in competitiveness and in the technological revolution implicit in energy transition. But López Obrador proposes using more crude oil, fuel oil, coal, building a refinery, eliminating competition and restoring state-run energy monopolies. Why does he do that? Is political control his objective?
Let us hope the Biden government will act to defend economic competition and force changes in López Obrador’s energy policy. He would do a great favor to us all, if he can pull Mexico along into a regional economic recovery and put us anew on the way towards the future and not towards the past.