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Trump or Biden a break-even for Mexican fuels

OPIS Mexico Fuels Report: Mexico's Fuel Market

Source: OPIS, an IHS Markit Company

By Sergio Meana / Argus

MEXICO CITY
Petroleumworld 10 14 2020

Neither candidate in the upcoming US presidential election would overtly seek to boost US investment in Mexico's refined products market while in office, but for different reasons.

Incumbent President Donald Trump sees international trade as a zero-sum game in which what is invested elsewhere is not invested in the US, said Duncan Wood, director of the Mexico Institute of the Wilson Center think tank in Washington, DC.

Several companies have complained to the US Trade Representative (USTR) about Mexico's efforts to slow competition in the fuel market during Trump's administration, with hopes of being helped by the entity that negotiated the US Mexico Canada (USMCA) free trade agreement.

"But USTR is going to have to pick its battles," Wood said. "It cannot fight all of its battles simultaneously and I do not think the energy sector is going to be their number one priority."

Democratic presidential candidate Joe Biden has pledged to focus on clean-energy initiatives, including investing $2 trillion to support renewable energy, have the US rejoin the Paris climate agreement, and restore energy regulations loosened during the Trump presidency. Those are goals that largely have little impact on fuel flows to Mexico.

But neither candidate as president is expected to significantly hinder the flow of US refined products to Mexico, where short supply has absorbed the growing US refinery overhang in recent years.

Mexico is now the biggest international buyer of US refined products. The US sent 975,000 b/d of all refined products in July more than double the 470,000 b/d sent a decade ago in July 2010. Pre-pandemic levels were even higher, at 1.25mn b/d in March, according to Energy Information Administration (EIA) data.

Joe cooler

Biden would likely have a more traditional diplomatic approach to Mexico than Trump, but could clash over environmental as well as trade issues with Mexico's president.

"If Biden is elected, the ship will slowly begin to veer in a different direction," said Rice University's US-Mexico Center director Tony Payan. "But there will be a slightly cooler relationship between Washington and Mexico City. Biden may want to pick up rebuilding some of the binational relationship. But we do not think it will be a cozy relationship."

The similarities between the two incumbent presidents, Mexico's Andres Manuel Lopez Obrador, often known as AMLO, and Trump extend beyond governance style. Lopez Obrador, like Trump, is focused on boosting domestic oil and natural gas production. And both have been fierce defenders of domestic industries.

Trump and AMLO's bonds grew early after they overcame obstacles to pass USMCA the follow-up to the North American Free Trade Agreement (Nafta) that formed the foundation of the "cozy relationship" between former Mexican president Carlos Salinas de Gortari and former US president George HW Bush in 1994. Trump and Lopez Obrador now appear to hold each other in high regard, particularly following cooperation on immigration controls and US support for Mexico's participation in Opec+.

Yet Trump who has largely avoided commenting on issues in Mexico other than trade and immigration has publicly shown less interest in the energy relationship. He did not heed a request from the American Petroleum Institute (API) to intercede on behalf of US investors in the refined products sector who complained to the US Trade Representative of discriminatory treatment from Mexican regulators favoring Mexican state companies .

Nor has he spoken out about Mexico's president overtly asking regulators to help boost state-owned Pemex and power company CFE.

And the USMCA which Trump championed provides thinner protections for investors than Nafta.

Internal threat

Still, Mexico's president Lopez Obrador looks like the main barrier for international investment in Mexico, more than either Trump or Biden. His government cancelled major private investment initiatives, including planned auction rounds for crude and natural gas exploration and production rights. His government forced renegotiation of natural gas pipeline contracts, and private fuel retailers have complained of aggressive station inspections and closures for minor infractions.

In the same week that the government presented a pared-down list of priority projects for which it would like to seek private investment, Lopez Obrador mocked International Monetary Fund recommendations for Mexico's economic policy.

But economic reality is likely to weigh more than political rhetoric, as Mexico will continue to be dependent on US fuel imports. Lopez Obrador's flagship project, a new 340,000 b/d refinery, would not meet the country's fuel needs in coming years, even if completed. Mexico could need 1.381mn b/d of gasoline, diesel and jet fuel when the administration's term ends in 2024, according to the most recent energy ministry forecast from November 2018.

Mexico in 2019 produced on average only about a quarter of that projected demand, and output fell even further since then to 290,000 b/d in August on the impacts of Covid-19. While the same pandemic could depress demand into 2024, the breach would still be sizable.

Given the gap, even if Lopez Obrador or the more radical factions of his Morena party want to close the door to investment and fuel imports, "the biggest pushback will be Mexico's continued energy decline," Payan said.

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