US, Mexico eye energy alliance

Mexico signals pro-US tilt as Bush, Fox begin talks today on an energy policy reaching from Anchorage to Acapulco.

When oil prices tripled last year, the United States saw Mexico as one of the culprits.

It formed a troika with Venezuela and Saudi Arabia that successfully limited production and pushed crude prices skyward.

But that was last year. If oil prices continue to fall, Americans may now have Mexico to thank.

Under the new Mexican president, Vicente Fox, Mexico is increasing its exports of crude to the US - a nod to a Bush proposal made during his presidential campaign to forge closer ties with Mexico as a way of reducing US dependence on oil farther afield.

Indeed, during today's informal meeting with President Bush, Mr. Fox is expected to begin discussing a US-proposed regional energy policy that would stretch from Anchorage to Acapulco.

Although implementation would face many financial and legal obstacles, Fox has signaled his receptivity to the idea, analysts say.

In contrast to recent years, Mexico last month ignored OPEC's call to trim global oil output and instead announced it would maintain current production levels.

"The fact that Mexico chose the eve of the Bush visit not to go with OPEC, but to move in a more pro-American direction, does imply there should be some form of reciprocity," says George Baker, director of Mexico Energy Intelligence, a Houston-based newsletter.

In return for these gestures, Fox is likely to be looking for some acknowledgment, such as a pledge of US investment in Mexican oil exploration and production, some analysts suggest. Although Mexico has more oil reserves than the United States - 29 billion barrels to the US' 22 billion - Mexico does not have the money or technology to exploit them. At present, Mexico actually imports large amounts of gasoline and natural gas from the US, the gasoline being largely Mexican crude sent north for refining.

Both countries would be acting in self- interest by setting the foundation of a regional energy policy, says Miguel Garcia Reyes, a specialist in regional energy policies at Colegio de Mexico in Mexico City. "Bush is saying he is favorable to more investment in energy in Mexico, but he's not doing that as a favor, he's reflecting his own country's need for big and stable energy supplies," Garcia says. "Fox is saying we have what the US wants [oil and gas], we just don't have the money to develop it."

The US demand for oil is 19 million barrels a day, with only 6 million to 7 million self-supplied.

Mexico produces 3.3 million barrels a day and exports about half of it, with most of the exports going to the United States.

In any move closer to the US on energy issues, Fox must strike a balance between domestic and regional interests.

Analysts here say Fox knows that it is not in Mexico's short-term interest to manipulate oil prices in a way that might deepen an economic downturn in the US, by far Mexico's biggest trading partner. At the same time, although oil's dominance of the Mexican economy has diminished as Mexico has diversified, oil still accounts for 35 percent of Mexican government revenues.

Before any significant foreign investment in Mexico's oil industry could take place, Fox would have to persuade Mexican lawmakers that foreign investment does not mean foreign control. Mexico nationalized its petroleum industry in the 1930s, and laws would have to be changed to allow a mix of private investment and public ownership.

Early on in his presidential campaign, Fox, a former Coca-Cola executive, suggested that Mexico's oil monopoly, Pemex, the world's fifth-largest oil producer, should be privatized, but a public outcry forced him to backpedal.

But now, in his third month in office, Fox is making changes at Pemex aimed at making it run more like a private company. He's filling the board of directors with successful, high-profile Mexican entrepreneurs and on Tuesday added Carlos Slim, chairman of Telefonos de Mexico, and Lorenzo Zambrano, chairman of Cemex, S.A., the world's third-largest cement company.

Fox is also pledging to reform fiscal law to ease Pemex's tax burden. For years Pemex directors have blamed taxes for hamstringing the company and keeping it from becoming an efficient enterprise with resources to invest in the country's future. Pemex has said it needs an investment of $10 billion to become self-sufficient in gasoline by 2007.

In proposing a regional energy policy, Bush is reviving a vision first outlined by his father as president. In 1992, Bush Sr. committed to providing a $5.6 billion line of credit for Pemex to develop oil fields in the Bay of Campeche.

But Fox may be looking for a more far-reaching response to his gesture than just the prospect of US help with oil industry development, Mr. Baker says. "Fox is looking for long-range, qualitative improvements in the US-Mexico relationship. He might look beyond energy and say, 'I want a US commitment to a broader migration program.' "

The Bush-Fox conversation, at Fox's ranch in the state of Guanajuato, is also expected to touch on electricity.

Bush caused a flurry of interest in Mexico in January when he cited Mexico as a potential source of electricity to alleviate California's power crisis. Mexican energy officials quickly dumped cold water on the idea, however, noting that in the short term Mexico would be doing well to meet its own galloping electricity demand.

Already some small examples of cooperation on electricity exist, however. Last month a gas-fired electrical plant in Baja California began sending 50 megawatts of electricity to California - enough to light up about 5,000 homes. The El Paso Electric Co. in El Paso, Texas, has long supplied electricity to neighboring Ciudad Juarez under year-to-year purchase agreements and is prepared to develop resources to offer Mexico more power under the right conditions.

"Mexico has long talked about increased interconnection with US electrical grids to allow a true symbiosis," says Eduardo A. Rodriguez, executive vice president with El Paso Electric.

"On the border we live the greater economic interdependence we're seeing with NAFTA [the North American Free Trade Agreement] and globalization. For us a long-term vision where the two countries support each other in common energy needs makes sense."

Electricity demand in Mexico is expected to grow as much as 7 percent annually over the next five years - requiring billions of dollars in investment that Mexico doesn't have. Mr. Rodriguez says El Paso Electric could supply more energy if it had a long-term purchase commitment from the Mexican side.

(c) Copyright 2001. The Christian Science Publishing Society