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Biofuel Industry and Future Sustainability in Mexico

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Biofuel Industry and Future Sustainability in Mexico BIOFUEL INDUSTRY AND FUTURE SUSTAINABILITY IN MEXICO JESUS PULIDO-CASTAÑON JAIME MARTINEZ-GARCIA School of Economics - Universidad Autonoma de San Luis Potosi INTRODUCTION Since the nationalization of the oil industry in Mexico, oil resources have played a critical role for the fueling of important economic sectors as well as in the funding of government spending (Blanchard, 2005). In the year of 1978, president Lopez-Portillo made a call to the population to “manage the abundance” referring to the large reserves of crude oil that were available under the national soil (Pazos, 1979). During the last decade, however, oil resources in Mexico have started to show signs of depletion (Blanchard, 2005) and as a result the future of the country´s economic development might be at stake. The situation of depleting oil resources could serve as an incentive to redirect the current process of energy production towards more sustainable and clean alternatives. In this context, this paper analyzes the opportunities presented by the development of a biofuel industry based on resources and technologies available in the country. THE IMPORTANCE OF OIL RESOURCES IN MEXICO During the period of 2000-2010, the production of energy in Mexico has been carried out through the exploitation of natural resources both renewable and non-renewable. In this regard, an important aspect is that crude oil has been the most significant source of energy in the country, producing approximately 90.5% (9,867 pentajoules) or nine tenths of the total energy production (SIE, 2012). In this context, from the total of energy consumed 26.62% was used by the industrial sector, 24.64% was used by the transportation sector, and the remaining 49% was divided among the energy transformation sector (oil and electricity) as well as the residential, commercial and public sectors (SIE, 2012). As a result of this, it can be inferred that oil production plays a major role in Mexico´s economic activity through the fueling of important sectors. In addition to this, as a result of the high oil prices since the 1970´s, the Mexican government became dependent on oil reserves for financing government spending (Blanchard, 2005). This was reflected on the speech of former President Lopez-Portillo “managing the abundance”, where he referred to the oil reserves available in the country (Pazos, 1979). During the period of 2000-2010, an average of 41% of the total energy production was exported primarily in the form of crude oil and its derivatives to foreign countries, allowing for the capture of an 'IAIA12 Conference Proceedings' Energy Future The Role of Impact Assessment 32nd Annual Meeting of the International Association for Impact Assessment 27 May- 1 June 2012, Centro de Congresso da Alfândega, Porto - Portugal (www.iaia.org) 2 average 25,792 millions of dollars per year (SIE, 2012). As a result, the composition of government spending funded through the sale and management of oil reserves has ranged from 30.4% to 38.0% during the same period (SCHP, 2012). THE STATE OF OIL RESERVES IN MEXICO Campbell (1997) has estimated oil reserves in Mexico would amount 10.4 billions barrels or 0.71% of the world total in early 2011. In this regard, the Mexican government has made an effort to increase proved oil reserves through increased spending on Exploration and Production (E&P) which rose from less than $2 billion in 1995 to over $5 billion by the late 1990s, and was expected to increase to $11 billion by 2003 (Blanchard, 2005). In spite of these investment efforts by the Mexican government, the possibilities of finding significant oil deposits in the future are very low. As Blanchard (2005) pointed out, increased investment in E&P will not translate into increased oil reserves due to the following considerations: the first reason is because the southern Gulf of Mexico has been largely explored without any major findings, while the second is due to the geological characteristics of the soil in the Northern Gulf of Mexico, which make unlikely the finding of large reservoirs in this area. A further conclusion made by Blanchard (2005) is that the turning point in Mexico´s oil production would be the reaching of a production peak in the Cantarell Complex, the largest reservoir known, by the year 2006. In this regard, the following table shows the estimations made by three sources for the peak of oil production as well as for future reductions in the rates of production. Table 1. Projected Oil Production Rates for Mexico Peak of Oil Production Decline in Oil Production Source Year Quantity Year Quantity Year Quantity Duncan and Youngquist 2001 3.62 mb/d* 2025 1.34 mb/d* 2039 0.460 mb/d* Campbell 2002 3.18 mb/d 2025 1.12 mb/d 2040 0.575 mb/d U.S. Energy Information 2004 3.85 mb/d - - - - Administration Source: Duncan and Youngquist (1999), ASPO (2012) and EIA (2012). Millions of barrels per day (mb/d) *Includes oil production plus natural gas liquids (NGL´S). As a result of this, it can be deduced that the production of oil in Mexico has already passed its highest point and it is unlikely that significant discoveries of oil deposits will be made. Considering the large 3 dependence on these resources this could translate into severe consequences for the process of economic development and planning in the country. THE CURRENT ROLE OF PEMEX Pemex, a government-owned company, maintains a monopoly on the exploitation of oil resources in Mexico by Constitutional law (CPEUM, article 28). It was founded in the 1930s by the Government of Lazaro Cardenas, during the period in which the Mexican revolution conceived the state as the main economic agent (Espadas-Ancona et al., 1997). Pemex exports a large share of its production, and is the sole seller in the domestic market of gasoline, fuels for transport and other petrochemicals. One source of inefficiency in the performance of Pemex is the absence of accountability, which could lead to corruption, both in its operations and in the relation with suppliers and the market. In this regard, a report states that 46 % of all the contracts are given without bidding to suppliers (El Universal, 12-02-2012), and in the last year they were also given on the exploration and refining side, which were formerly reserved to Pemex by constitutional right (Ravelo, 2011). The lack of investment in infrastructure, the depletion of oil fields and the non-discovery of new reserves have caused a fall in oil output in the last seven years. According to Pemex Chief Executive, Juan Jose Suarez Coppel, “… the oil company's internal production goal has been 2.6 million barrels a day or better in order to end a production slide that began in 2005 as the supergiant Cantarell oil fields started to decline after years of heavy output. In fact, in the last two years, Pemex produced 2,601 million barrels of crude oil per day in 2009, and 2,576 million barrels a day in 2010 (MarketWatch, 2011). Unfortunately, the current trend in Pemex is to exploit as much as possible from the national oil reserves, to maximize revenues and to hand out this sector to private investors. Considering this, there is an urgent need for both the design and implementation of an integral state policy, which includes a strategy for the substitution of fossil fuels with other non-conventional sources of energy. THE STATE OF THE AGRICULTURAL SECTOR IN MEXICO In the beginning of the modern Mexican state, the agricultural sector was central to its policies, due to the agrarian nature of the Mexican revolution, and the share of this activity in the structure of domestic production (Yunez-Naude and Barceinas-Paredes, 2006). In the decades of 1970s and 1980s, the deficits in public budgets, the obligations derived from external debt, the collapse of the international bipolar system and the process of globalization forced the Mexican government to overhaul the whole economic and political system (ibid). One of the main reforms in this period included the opening of the economy to foreign investment and trade, and the signing of trade 4 agreements, e.g. the GATT and North American Free Trade Agreement (World Development Report, 1997). As a result of this movement, the Mexican government fostered a policy of in-bond (maquila) industrialization, focused on the market of the United States (Carbaugh, 1999). Many industrial facilities were built mainly in the Northern states, and many Mexican peasants became urban labourers in the maquila industry (ibid). NAFTA also eliminated import restrictions on U.S. agricultural products, which were more cheap and accessible due to the competitiveness of U.S. farmers and the lack of investment in the rural Mexican sector (Yunez-Naude and Taylor 2006). These actions reversed the terms of trade in agricultural products, and Mexico became an importer of foods and agricultural inputs (ibid). Since 1994, the Mexican Government neglected the rural sector in terms of investment in comparison to developed, industrialized countries, where the agricultural sector is a strategic and a form of national security (ibid). In addition to this, trade policies have been a contributing factor for a net decrease in the number of people employed in agriculture, particularly after NAFTA came into effect (Puyana and Romero, 2004). Therefore, an energy sector policy in Mexico must be based on a re-orientation of the role of the agricultural sector in terms of the welfare of the population – both rural and urban-, as a provider of the inputs required for a non-conventional energy industry, as well as a redefinition of its importance as a strategic sector for national security, as oil production levels continue to dip towards inefficiency.
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