Hablando de Mercado: What do the midterm elections mean for the Mexican energy market?

Author Argus

The midterm elections in the United States may not be as talked about as the presidential ones, but they have special implications for the Mexican energy market.

Join Josh Vence, Argus Business Development Manager for Latin America, and Sergio Meana, Senior Mexico Correspondent for Argus Media, and learn more about the new political and financial climate for the vast fuels market in Mexico.

 

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Transcript:

Josh Vence (JV): Hello and welcome to Hablando de Mercado (“Market Talks”) – a series of podcasts presented by Argus on the main events affecting the energy and raw materials industries in Latin America and the rest of the world. My name is Josh Vence, and I am a Business Development Manager at Argus for Latin America. In today’s episode, we will be speaking with Sergio Meana, senior correspondent for Argus in Mexico about the impacts of the midterm elections in the United States for the Mexican energy market.

Welcome, Sergio!

Sergio Meana (SM): Hello, Josh. Thank you for the invitation. It’s a pleasure to be here with you.

JV: Thank you for joining us! Sergio, it seems, at first glance, that a midterm election in the United States Congress might not have many impacts for other countries, but Argus’ analysis of a possible special impact for Mexico has drawn my attention. What is it about?

Sergio Meana (SM): Hello, Josh, glad to be here and to see more and more subscribers to our podcast. Yes, like you said, at first glance, a midterm election does not generate the same buzz as a presidential one, of course, and that is clear in all countries, but in this case in particular, the mere fact that the midterm election has already finished in the United States is crucial for Mexico and the energy market, since the eyes of the representatives of the Chamber of Commerce in Washington are now returning to where they left off regarding Mexico. In other words, they are going to return to the negotiations on Mexican energy policy, as there was a clear freeze on the talks during the elections, according to a key source in Washington.

Here’s a bit of context, Josh: In July of this year, the United States and Canada, through the Mexico-United States-Canada Agreement – called T-MEC (in Spanish) or USMCA (in English) – filed a complaint on the Mexican energy policy, noting, above all, that the Mexican government has not respected the Investment Agreement and does not allow private companies to invest in the energy sector as much as they used to be able to. We’re now reaching a last phase of multilateral negotiations, with key implications for Mexico, in which we could see major changes in Mexican energy policy or a formal process of sanctions.

JV: Sergio, could you give us a recap of where these negotiations ended and what they have implied?

SM: Sure, Josh. It is a formal process from the USMCA, establishing that there should first be a consultation process through which the requesting countries – in this case, the United States and Canada – ask questions and establish a dialogue with Mexico on its reasons and positions. In fact, this period had a deadline of 75 days, from July to October 5, but a decision was made to extend the period. What could happen now is that there could be a panel with formal sanctions for Mexico.

What is interesting to hear, however, is that these same consultations have already generated changes in the Mexican sector, even though the Mexican government does not wish to accept them. I am not sure if you recall, but we discussed them in our last podcast. Essentially, there has been a little more openness from the government regarding the opening of new private fuel storage facilities. Also, since the last time we spoke, almost 200 new permits for gas stations or service stations have been granted. Fuel import companies are also now eligible for subsidies granted by the Government – something that virtually only Pemex was achieving before.

JV: That is an interesting take, Sergio, since the population in the United States is still expecting final results, but for Mexico the important thing is that the election ends so that it can continue with the negotiating process. Now, regarding the actual results of the U.S. election, what do they suggest for Mexico?

SM: One of the first implications is that the Democratic Party and President Joe Biden will maintain control of the Senate, which means that President Biden’s climate agenda can continue to be pushed from there. That is already important for Mexico, since the climate agenda is one of the biggest clashes with Mexico, the so-called southern neighbor. President Biden’s climate agenda may result in more pressure on Mexico to produce less fuel and shift towards a cleaner agenda, despite the attempts by President Obrador to continue producing gasoline and diesel in Mexico to satisfy all internal demand with domestic production.

The other part of this answer – if you will allow me, Josh – is a bit about what would have happened with the famous Red Wave. Had the GOP gained control of both Houses, it is very likely that direct trade and energy sanctions would have been imposed on Mexico through the USMCA, while the relative victory of the Democratic party suggests that things will continue with the encouragement of negotiations regarding the Free Trade Agreement complaint.

JV: Why do you think there would be more sanctions from the Republican Party? Could they impose them directly?

SM: That is a good question, Josh. In fact, it is not really an obvious topic, and it does need to be explained. In the Republican Party, the issue is that they have known how to take advantage of the discontent with Mexico and, especially, the immigration policy. With a stronger victory for the so-called Trump party, they could have capitalized on that anger with calls for direct sanctions on Mexico from Congress. Now, it is important to point out that sanctions are not something that the Congress of any country imposes – neither the United States, nor Canada, nor Mexico. For there to be sanctions, a panel with experts from the three countries would have to be composed, but there would be greater pressure from the Republicans on the representatives of the United States.

JV: What could Mexico do regarding this political scenario in the United States?

SM: Here, a number of analysts have discussed and read that Mexico must prepare a new defense strategy for the Free Trade Agreement negotiations and its energy policy. It seems that a strengthened Democratic Party, which maintained control of the Senate, could now have improved and renewed negotiations with Mexico. So, what is seen from Mexico, according to analysts, is that the country will have to rethink its defense strategy in the USMCA not only for the Democratic party, but also for a Republican Party, which despite not winning what was expected, will have more weight in the following two years in the United States Congress.

JV: Now, an issue that is also talked about a lot in the midterm elections is the future of the 2024 presidential election. What do you see happening for Mexico?

SM: Definitively, these elections shed light on what the 2024 elections in the United States could be like. At Argus, what we have discussed with our colleagues in Washington is that, perhaps, there would be a change of leadership for the Leader of the Republican Party. Former President Donald Trump looks like he hasn’t had the best election journey, and some are already promoting Florida Governor Ron DeSantis as the next Republican nominee for President of the United States. This conflagration of political facts, although it seems otherwise due to Trump’s polarizing speech, may not be the best for President Lopez Obrador. In the end, AMLO, as the Mexican President is known, had already reached an understanding with former President Trump and, perhaps, they could even call each other friends. Rebuilding a relationship with another possible Republican candidate, in the same year in which Mexico also has its presidential elections, is going to be a complicated process, as U.S.-Mexico relations could cool down.

JV: How interesting to hear about the implications of U.S. policy for the Mexican energy market. Thank you, Sergio, for joining us!

SM: I’d like to thank Argus for the invitation.

JV: Visit our website for more information about our publications at www.argusmedia.com.

You can listen to this and other episodes of our podcast series in Spanish, available through our website at www.argusmedia.com/hablando-de-mercado.

Make sure you like, share and visit our page to follow the events affecting the world commodity market and to learn more about its effects in Latin America. We’ll be back soon with another edition of Hablando de Mercado. Bye!

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