By Antonio Ortiz-Mena López Negrete *
International energy relations have rarely been left solely to the market, given the role energy security plays in national security. Being too dependent on energy imports can make a country vulnerable, as many European countries have found out given Russian gas supply disruptions related to Russia’s invasion of Ukraine. At the other extreme, seeking energy self-sufficiency at any cost can also make a country vulnerable, if it entails a low level of economic diversification.
Each country seeks to strike a right balance for its circumstances in terms of energy production and energy imports, and the role that the public and private sectors play. In the 20th century, Mexico faced two critical moments regarding its international energy policy: in 1938, which led to the expropriation of the oil industry, and in 1960, when it nationalized the electricity industry.
Lessons from those two episodes are still valid for the critical juncture it is currently facing, regarding consultations with the U.S. and Canada over Mexico’s energy policies.
In 1938, the Government of President Lázaro Cárdenas expropriated foreign oil companies. This action was not based on a belief that foreign investment should be forbidden in the oil industry or that the state should be the sole participant. Rather, it came about because of a labor dispute between the recently-created oil workers union and foreign companies, particularly El Águila, which was U.S.-owned. The company held that it could not afford the raise requested by the union, a panel of experts found that a compromise solution was financially feasible, and the Labor Relations Board sided with the experts’ findings. The matter reached the Supreme Court, yet still El Águila still refused to comply.
President Cárdenas met with company owners and gave them his word that the raise determined by the experts would resolve the issue and there would be no more immediate raises, but the owners said they could not trust him. Cárdenas then decided to apply Mexico’s Expropriation Law: it was not acceptable, from a rule of law and governance perspective, for companies (foreign or domestic) to ignore a Supreme Court ruling. In addition, given that there was no successful contract negotiation between the company and the union, this risked a halt in oil production, which posed an economic risk. The decision to nationalize was taken to resolve a specific problem when other avenues were shut, and foreign companies were duly compensated. The summary above is based on the very detailed and well-documented account in the book Cárdenas por Cárdenas (Debate, 2016).
In 1960, President Adolfo López Mateos nationalized the electricity industry. As was the case with Cárdenas, this was a way to resolve a specific problem and not purely driven by overriding ideological considerations. The following account is based on the book El Desarrollo Estabilizador: Reflexiones de Una Época (FCE, 1998). The Mexican economy was growing at a fast pace at the time, and it faced a 10 percent annual increase in energy demand. Greater coverage was needed for industrializing urban centers and for rural areas that were seeking to increase agricultural production. Foreign companies were not willing to increase their investment and generation capacity without significant rate hikes, which the government deemed unnecessary and unacceptable.
Eugene Black, then President of the World Bank, notified López Mateos that unless the rate hikes were authorized, the World Bank would cease granting credits to Mexico. This strong-arm tactic backfired, for it showed the Mexican government that it was vulnerable to unwarranted political pressure from the U.S. if it continued to rely to a large extent on U.S. energy companies.
There were two major international companies: U.S.-owned American Foreign Power and European-owned Mexican Light and Power. The Mexican government reached an agreement to purchase American Foreign Power, on credit, to demonstrate to private investors that it was an amicable arrangement. In addition, the company owner committed to investing the earnings from the sale in Mexico. This was an additional confidence-boosting signal. Mexican Light and Power was a listed company, and the Mexican government executed a sophisticated takeover by acquiring shares via a third party.
Throughout the negotiations over the electricity industry, the Mexican government kept the U.S. Treasury, members of Congress, the International Monetary Fund (IMF), and Wall Street investors informed on an as-needed basis to maintain confidence and allay fears about the prospects for foreign investment in Mexico at a delicate time during the Cold War, just after the 1959 Cuban Revolution. Once Eugene Black left the World Bank in 1962, Mexico was able to secure a World Bank loan to foster its economic development and send yet another signal of confidence to international investors.
Mexico is now facing consultations under USMCA for its energy policies. Wages and unions are no longer the issue: the USMCA has one of the strongest labor provisions of any trade agreement, and the current U.S. administration has good relations with labor. Neither is an unwillingness to invest in electricity generation, in both urban and urban areas. Quite the contrary: U.S. and Canadian companies are complaining about the difficulties they encounter when attempting to develop electricity generation projects, and the rates they can offer are usually below those of Mexican-owned utility CFE.
If what Mexico seeks is energy security (as opposed to self-sufficiency), it could define in starker terms the specific goals it wishes to attain and be pragmatic about means, as Cárdenas and López Mateos did. There is ample scope for private sector participation, both foreign and domestic, in boosting energy security and ensuring Mexico has sufficient energy that is clean and reliable, to take advantage of near-shoring opportunities. Defining an objective clearly and realistically, seeking pragmatic solutions, and maintaining an open and constructive dialogue with key players and foreign governments has worked in the past, and there is no reason why similar solutions cannot be attained. Part of Mexico’s energy future lies in lessons from its energy past.