Trump victory raises questions about Mexico-US energy cooperation

Thursday, November 10, 2016

Given the anti-Mexico rhetoric and the threats to dismantle Nafta during his campaign, the election of Donald Trump as US president obviously raises questions south of the border regarding the future of bilateral relations.

"Trump's victory increases economic uncertainty for Mexico, and may add downside risks to economic growth," Fitch Ratings said in a note early Wednesday, highlighting Trump's statements supporting increased trade protectionism during his campaign (including the potential renegotiation or scrapping of the North American Free Trade Agreement).

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But one of the sectors that could be most impacted by the Republican's victory is energy.

Having once claimed that the concept of global warming was created by the Chinese to make US manufacturing uncompetitive, Trump's denial of climate change may mean his presidency results in a reversal of policies set in place during the Obama administration, such as the agreement reached between the US, Mexico and Canada in June to generate 50% of their electricity from clean energy sources by 2025, up from approximately 37% currently.

The plan involves support for cross-border transmission lines, including infrastructure for renewable energy, something that may be obstructed if Trump's controversial pledge to build a border wall comes to fruition.

An unwinding of Nafta would harm both Mexican and US exports, which currently are mostly tariff-free, but Mexico could potentially take advantage of such a scenario if it were to support local industry, while exporters would benefit from a weaker peso. The currency lost ground against the US dollar overnight, passing the 20-peso threshold for the first time.

Uncertainty remains the key word as energy sector players and observers assimilate the election result.

"Such uncertainty would result in state utility CFE and the Mexican economy tightening their belts to be even more risk adverse," Don Walter, CEO of US firm Sonora Energy Group, told BNamericas.

"If Mexico played its cards wisely, it can use these winds of change to expand markets for Mexican products and grow stronger – particularly in the energy sector," he added.

"Trump's environmental and energy rhetoric support an argument that natural gas prices will decrease in the US, which would further damage the country's renewable energy industry and which, ironically, will allow Mexico to benefit," Walter said.

Trump could also derail fledgling negotiations with Mexico and Cuba concerning the so-called Eastern Polygon and the hydrocarbon reserves located where the three nations' exclusive economic zones overlap in the Gulf of Mexico. Delegates from the three countries met in October with a view to delineating a maritime border.

"There is no stopping Trump reversing the agreements made with other countries," Manan Parikh, a solar analyst at GTM Research in Boston, told BNamericas.

"In the context of Mexico, regarding diplomatic relations and the US energy strategy, and as Mexico undergoes its energy transition, what role will the US now play in the market? We'll have to wait and see if the US takes the lead or charts an independent course."