By Evan Carlo
Staff Writer

The shale revolution changed the United States’ energy industry and set the country on a course to becoming an energy superpower. The combination of two technologies, hydraulic fracking and horizontal drilling, unlocked previously unobtainable oil and gas fields while increasing efficiency. Reserves are now higher than at any point since 1975. After suffering 30 years of declining oil production, the United States reversed this downward trend and produced more oil in January 2015 than in any month since January 1973. Texas alone is projected to become the eighth largest oil producer in the world in 2015, ahead of Mexico, Kuwait and Iraq.

In the natural gas market, U.S. production is predicted to reach 72.8 billion cubic feet in January, a record peak in gas production. With the success of the American energy industry, some have wondered if this success can be transferred to its neighboring country, Mexico. With new energy reforms passed last August, Mexico could potentially undergo an energy renaissance similar to that of the United States.

Historical Energy Reform Laws

The new energy reforms aim to make the Mexican energy industry more competitive and economically efficient in the face of declining oil production. Since 2004, oil production has declined from about 3,847,000 barrels a day to 2,907,000 barrels a day in 2013. The energy industry has suffered from underinvestment and a lack of human capital causing the decline in production. Without sufficiently trained engineers with technical expertise and modern technology, many oil and gas reserves remain unproductive. Part of the problem was the monopoly the state-owned energy company Pemex held over oil and gas production, and the restrictions on foreign investment in the energy sector.

The new laws signed by President Enrique Pena Nieto addressed these problems by ending Pemex’s monopoly and opening up the energy sector to foreign investment. Now foreign companies will be allowed to compete with state-owned companies in the bidding process for contracts and licenses on oil and gas fields. As early as July of this year, Mexico will offer the first oil and gas blocks to private companies, awarding access to 14 exploratory fields in the Gulf of Mexico. However, there are still some limitations on foreign investment. The oil and gas rights are still owned by the Mexican state. Foreign companies only receive the revenues from the sale of oil and gas. Regardless, the laws passed represent a big change in the Mexican energy landscape.

Fracking and Horizontal Drilling Opportunities

Investment from the United States will not only bring the money Mexico needs, but also the technological methods needed to extract unconventional oil and gas. Despite having the sixth largest shale gas reserves in the world, Mexico has only built a few shale wells, leaving the vast majority of reserves untouched. Part of the reason is that there are no Mexican companies with an expertise in fracking or horizontal drilling. Without these two techniques, Mexico cannot access the vast reserves of oil and natural gas locked up in shale formations. Mexico could potentially extract 62 billion barrels of oil in shale fields in northern and eastern Mexico and 29.5 billion barrels in deep-water fields if these techniques are used.

American companies see this as a new opportunity to expand their business and profits in a country where there is essentially no competition in fracking or horizontal drilling. By using American technology, much of Mexico’s unconventional oil and gas reserves can be unlocked. There is much optimism that this will be accomplished. Just after the passage of the reform laws, the Energy Information Administration increased Mexico’s 2040 oil forecasts by 75 percent.

If these technologies are used correctly, shale rich states such as Nuevo Leon can become new leaders in energy. The Governor of Nuevo Leon, Rodrigo Medina, stated that, “the goal is for Monterrey to become the new energy capital, from wind to shale…the Houston [or] Dallas of Mexico.” Texan businesses have already begun preparing to invest in Nuevo Leon, with business leaders and government representatives from Houston meeting with Nuevo Leon representatives last November 3 to discuss possible investment in the region. This type of investment and cooperation will link the economies of the United States and Mexico even closer.

Economic Benefits

The United States has already benefitted from many economic opportunities from as a result of fracking and horizontal drilling. According to a study from energy expert IHS, the shale energy boom increased the average household disposable income in 2012 by $1,200 and is predicted to grow to $2,700 by 2020. The industry also supported 2.1 million jobs in 2012.

A second shale boom in Mexico would provide more jobs and economic opportunities for Americans. American engineers and consultants will be in high demand to bring their expertise to Mexican shale fields. Nathaniel Karp, a chief economist for BBVA, testified at a Texas Senate subcommittee that the energy reforms could potentially add more than 217,000 jobs and $45 billion in GDP to the Texas economy. As profits from Texas fields begin to decline due to diminishing marginal returns, businesses and employs will increasingly head south to expand. This will further increase the economic benefits already realized in the shale industry.

A second shale boom will also greatly help Mexico’s economy, which has been suffering from anemic growth the last few years. The increased investment will directly provide much-needed jobs to Mexican workers who normally would migrate north. Despite fears that allowing foreign investment will take jobs away from domestic workers, regulators require companies that win the bid on exploration contracts to meet a national content requirement of 25 percent at the beginning of the contract and 35 percent several years later. This means 25 percent and then 35 percent of the goods, services, and labor used by foreign companies must come from Mexico.

In addition to employment gains and economic growth, increased investment will bring down energy costs to Mexican consumers. Mexico currently suffers from high gas prices that are double the prices in the United States and Canada. Increasing production in shale gas fields will increase the supply of natural gas and consequently bring down prices in Mexico. This not only benefits consumers but also industries that rely on natural gas for electricity.

Challenges and the Downside of Energy Reform

Despite the positive economic impact the energy reform laws bring to America and Mexico, there are also challenges and negative consequences. The biggest is the negative environmental impact of increased oil and natural gas extraction. Fracking impacts the environment in a variety of ways including air pollution and ground water contamination. Higher oil consumption will increase the amount of carbon dioxide in the atmosphere and further exacerbate global warming. These environmental issues needed to be weighed against the potential economic gains of increased energy production.

Even if the economic benefits outweigh the environmental costs, several factors may make increased foreign investment difficult. Mexico’s security problems pose a threat to U.S. businesses that want to operate in the country. Much of the untapped shale reserves reside in areas of the country that are at risk of cartel violence. While companies can hire private security to protect their projects, this added risk could make companies more reluctant to invest.

In addition, low oil prices threaten to undo the American shale industry. Shale oil and gas is more expensive to extract than other conventional methods, making the break-even price of shale oil $58 for the average shale producer. With current Western Texas Intermediate crude prices at $48.84, many shale projects are unprofitable. If prices stay too low for the foreseeable future, business will unlikely invest in Mexican shale production.

However both of these challenges are manageable. Despite cartel violence, many international oil companies have dealt with security issues in politically unstable countries before, such as Iraq and Nigeria. While smaller companies that operate in Texas do not have the experience to combat security threats, international companies will be able to operate in cartel zones safely. And if these companies invest in regions with high cartel violence, the increased economic activity and employment may drive people away from working in the cartels, making the area safer.

Falling oil prices also will most likely not completely prevent foreign investment from coming into the country. According to Rystad Energy, even though oil prices are falling, the break-even costs of extracting shale oil has also fallen in the fast few years. Innovation and efficiency can bring down the cost of drilling further, making low oil prices manageable.

These challenges represent a temporary setback for foreign investment into Mexico that will delay the development of shale oil and gas wells. Eventually, international companies will begin to invest in Mexico and bring fracking and horizontal drilling techniques with them. While the use of fracking and horizontal drilling will most likely not have the same magnitude of an effect on Mexico as it has in the United States, over time Mexican oil production should begin to recover and reverse the downturn in oil production. Long term, oil production may recover to its 2004 peak of 3.8 million barrels a day. If the projects by the Energy Information Agency are correct, by 2040 Mexico will be producing 3.7 million barrels a day, just 100,000 below the 2004 peak. Overall, these reforms should revitalize the oil industry and bring economic benefits to both the United States and Mexico.

Image by FadderUri


By Evan Carlo
Staff Writer

We are currently in year 44 of the War on Drugs and year eight of the Mexican Campaign but not much progress has been made in defeating the Mexican drug cartels. Since Mexican President Felipe Calderón’s declaration of war against the Mexican drug cartels in 2006, more than 60,000 people have died in drug related violence with another 26,000 missing. Despite this, the cartels are no closer to defeat. They still control large areas of Mexico, and even more frightening for Americans, the cartels have spread their operations deep into the United States, operating in more than 1,200 American communities. No matter how many cartel leaders are arrested or killed, the cartels will continue to operate and expand their reach. With the situation dire and Mexican citizens no longer tolerating the corruption that has plagued their country, maybe it is time to ask, “Should we nuke the drug cartels?”

Before I am denounced as a warmonger, let me be clear that by saying “nuke the drug cartels”, I do not mean unleashing 510 megatons of TNT on Tijuana or Ciudad Juarez. I mean hitting the cartels with our ultimate weapon – marijuana legalization. The phrase comes from a chapter in Lt. Col. Robert Dowd’s book “The Enemy is Us.” [1] Lt. Col. Dowd argues that marijuana legalization would be the equivalent of a nuclear bomb for the cartels, wiping them out. Legalization would allow businesses in the United States to sell previously illegal marijuana and compete with the cartels. This will affect the cartels in one of three ways: the cartels will lose market share and profits against legal U.S. businesses, the price of marijuana will fall to the point where it is not profitable for the cartels to operate, or the cartels will become legal businesses that no longer need to resort to violence to enforce contracts.

Similar arguments have been made by people on all sides of the political spectrum, reminiscent of 1920’s alcohol prohibition. With no legal competition, crime bosses such as Al Capone took advantage of the opportunity and created a black market for alcohol. The result was a crime wave of gangs fighting each other for control of the market. Homicide rates rose all over the country, especially in major cities such as Chicago. Corruption of federal, state and local law enforcement officers undermined the public’s trust in the rule of law. While some scholars have tried to downplay the negative effects of alcohol prohibition, from a security standpoint it was a disaster. For 14 years the mob ran the alcohol industry. That is, until the legalization ended the monopoly, the mob had on the industry and allowed legal competition to compete in a safe, regulated environment.

One cannot help but draw comparisons between 1920s Chicago to 2014 Mexico. It seems possible then that if legalization was the key to ending the alcohol cartels, drug legalization can end the drug cartels. While many have brought up this point before, there have been very few academic studies rigorously evaluating the effects of recently passed drug legalization propositions on the cartels.

For example, a Rand Corporation study from 2010 tried to predict the impact of California potentially legalizing marijuana. Despite claims otherwise, the study suggests that marijuana legalization would not have the large impact on cartels legalization advocates were hoping for. The study disputes the claim from U.S. officials that 60 percent of Mexican cartel profits come from marijuana, estimating it closer to 15 to 26 percent. Legalization in only California would affect 2 to 4 percent of the cartel’s export revenues. However, the study also claimed that if California were able to smuggle marijuana to other states, effectively legalizing marijuana nationwide, this would cause cartels to lose approximately 20 percent of their total drug export revenues.

A similar study by the Mexican Institute of Competitiveness that tried to predict the impact of legalization in Colorado, Oregon and Washington, made a somewhat similar claim. It predicted that legalization would cause drug revenues for cartels to drop 22 to 30 percent in each individual state. If the results of both studies hold for each state, the cartels could possibly lose 20 to 30 percent of their revenues from selling to the United States were nationwide legalization fully implemented.

While these studies should be viewed with a grain of salt, there is some empirical evidence from recent legalization efforts to back them up. With just a few states legalizing marijuana, farmers in the Sinaloa region of Mexico have stopped planting marijuana since the wholesale price of marijuana has plummeted, fitting with predictions that legalization will hurt the marijuana profits of cartels. Drug cartels are finding it difficult to compete in the marijuana market now that it faces competition from the United States. Does this evidence prove drug legalization is the weapon that can destroy the cartels? Well, not quite.

Despite the evidence that legalization could damage the cartels in the marijuana market, this will most likely not destroy the cartels completely. The cartels have been able to diversify their business by pushing into harder drugs. This diversification makes the cartels more immune to changes in the marijuana market even if more states legalize. Even though farmers in the Sinaloa region plant less marijuana, they have shifted into planting more opium for heroin production.

Advocates of legalizing all drugs, including hard drugs such as cocaine and heroin, will counter that this would not be a problem if all drugs were legalized. Regardless if this is true, it is highly improbable that harder drugs will be legalized in the near future. While a majority of U.S. citizens favor marijuana legalization, very few favor legalizing harder drugs such as heroin. Thus, politically it is impractical for hard drug legalization to be a policy option in harming the drug cartels.

So which side is right in this debate? Well in reality, neither side is. It is true that cartels have been able to diversify to the point where they do not need to rely solely on marijuana to survive. Even if the United States legalizes all drugs, which is highly unlikely, cartels can still make money moving into non-drug related illegal activities such as smuggling, extortion, kidnapping and prostitution.

Drug legalization will not be equivalent to nuking the cartels, but legalization can still hurt the cartels. Even if marijuana is the only drug legalized, it will still damage the cartels despite their attempts to diversify into new business areas. Even the Rand Corporation’s conservative estimates show the cartels will lose a significant chunk of their drug trade revenue.

While marijuana legalization may not be the nuke Lt. Col. Robert Dowd hoped for, it may be the “airstrike” we need against the cartels. Military history shows us that airstrikes need to be combined with ground assaults to be effective. Defeating the cartels and providing better security to Mexico and the United States, will require both “airstrikes” and “ground assaults.” Mexico should continue to use force to interrupt supply chains and target cartel leaders. The Calderon Administration has achieved moderate success in this area, such as when the Beltrán Leyva cartel was effectively destroyed after armed forces killed its leader in 2009. Mexico’s strategy also needs to emphasize cracking down on corruption and targeting the money laundering that finances drug cartels’ bribes to government officials. However, force and fighting corruption alone will not solve this problem. Even if some people may still be uncomfortable with drug legalization, it should be considered as a useful policy option to use in combination with these harder tactics.

Image by Heavybm

[1] Dowd, Lt. Col. Robert H. The Enemy is Us: How to Defeat Drug Abuse and and End the “War on Drugs.” Sarasota: BookWorld Press, 1997. Book.



Editor’s Note: This is the second article in a two-part Prospect Journal series on the unrest in Mexico. The first part can be found here.

By Alejandro Inzunza
Staff Writer

“Optimistic and encouraging” were the words Mexican President Enrique Peña Nieto used to describe Mexico’s economic prospects in Shanghai this week. The president had arrived in China three days prior to participate in the XII Asia-Pacific Economic Cooperation Forum (APEC) before heading to Australia to attend this year’s G20 Leader’s Summit in Brisbane. As the president embarked on trade missions during some of Mexico’s most tumultuous times in recent memory, one can’t help but wonder if the same words can be used to reference the nation’s sociopolitical future as well.

A Glaring Absence at the Summit

Polemically elected with 38 percent of the vote in 2012, President Peña and his administration have been the subject of widespread debate and domestic criticism since his electoral victory. A member of the Institutional Revolutionary Party (PRI) that ruled Mexico for over 70 years, and currently controls a plurality in both houses of Congress, Peña has pursued several ambitious reforms that have made him a divisive figure at home while earning him notable attention abroad. Although the president has made strong efforts to change how Mexico is perceived in the world, domestic woes are increasingly eroding the positive narrative of his administration.

During his first two years in office, economic growth has been stagnant and crime and extortion remain on the rise. A breakdown of official statistics reveals that a staggering 34% of Mexicans were victims of criminal acts in 2013 and that 94% of crimes go unreported.

Yet despite the president’s divisiveness, prominent supporters wonder why Mexicans have taken up protest against their federal government and are quick to defend it. After all, the ‘Imperial Couple’—the political couple alleged to be the authors of the kidnapping and possible execution of the 43 missing students—belonged to Mexico’s Party of the Democratic Revolution (PRD)—a major opposition party on the political left—not the PRI. Controversial as they may be, supporters of the regime are right to point out the relevance of Jose Luis Abarca’s political allegiances and their connections to his alleged crimes. The PRD’s control of Guerrero’s governorship and state legislature raises questions about the nature of Abarca’s relationship with his former party and whether or not he managed to act without tacit or explicit support from its current members.

Calls for an investigation into Abarca’s political links can therefore be justified. Yet an investigation can only succeed if the process remains transparent, occurring under the watchful eye of the public and under supervision of external independent groups that can insure an impartial oversight. Although not investigating party officials risks permitting the guilty to evade justice, while fostering more unaccountability, a partisan inquiry can easily become a political persecution in legal disguise. While arguments that favor investigating Abarca’s links and party have merit, the claim that Peña and his administration are blameless rings hollow given the circumstances and nature of the regime.

Much of the current discontent stems from the belated and tone-deaf reaction of the president and his administration. The outrage over the fate and disappearance of the 43 missing students has only been amplified by the way in which the federal government has responded to the tragedy: Federal agencies took more than a week to get involved in the investigation, and the president himself took ten days to address the situation in a public manner. Peña has not yet visited the still-mourning state of Guerrero, nor commented on the issue in independent media outlets. While the president welcomed the parents of the missing students, he did so a month after the massacre had occurred. Additionally, his recent visit to China and Australia prompted critics to remark that the president was leaving the country during a time of crisis and seemed callous given the preceding events.

Peña’s guilt therefore lies not in his direct involvement but in the negligence that he and his administration have displayed in handling the aftermath. The president has displayed an inability to lead at a moment when the country desperately needs guidance and hope. Regardless of party, the nation’s highest office is the only unifying source of national leadership in the face of crisis and adversity. Enrique Peña Nieto has so far failed to exercise that authority, and through that failure has exposed a leadership deficit that only compounds the suffering of a nation in shock. To make matters worse, his attendance of the summit coincided with the release of controversial reports regarding the first family’s $7 million home.

Nicknamed Peña’s ‘White House’ in reference to its color, the stunning property is legally owned by Ingeniería Inmobiliaria del Centro, a company that was awarded lucrative contracts during Peña’s term as Governor of the State of Mexico. The company also forms part of Grupo Higa, a corporation whose construction arm was part of the Chinese-led consortium that recently won a $3.7 billion contract to build Mexico’s first bullet train. The contract was abruptly canceled after mounting criticism and suspicion surrounding the transparency and timeframe of the bidding process: the winning bid was the only proposal submitted.

Scandal over the house has only grown since the president’s spokesperson revealed that the estate actually belongs to Mexico’s first lady, former actress Angélica Rivera. The administration attempted to quell doubts through a press release stating the property is currently being paid for by the first lady, and that her long career has made her financially solvent and capable of affording such an estate. Ironically, this development has only raised further questions.

Rivera also owns a $2.2 million mansion adjacent to the ‘White House’ and is not, unlike the president, legally required to disclose her assets under Mexican law. Fresh revelations that the properties were actually donated to the first lady by Televisa—Mexico’s predominant media conglomerate—as part of her compensation package have only raised further doubts. Inquiries into the matter are currently hampered by government claims that the first lady’s financial information is classified.

Given that Mexico’s ‘White House’ is literally owned by a contractor that has benefitted under Peña’s rule, and was gifted to his wife by a media monopoly with links to his party, it is no surprise that the sumptuous estate is generating so much controversy in a country where half of the population lives in poverty.

Protests and Deja Vu

All of this brings us back to the protests currently stirring Mexico and partly explains why the current administration has become a target of social unrest. Sparked by the disappearance and likely murder of the 43 students, the demonstrations are turning increasingly violent. Furthermore, they have only grown in their frequency and size. Protestors have torched Iguala’s city hall, burned Guerrero’s state capitol, set fire to the PRI’s Guerrero headquarters, and attempted to set the National Palace aflame. Additionally, demonstrators have temporarily blocked major airports and roads.

It would be irresponsible, however, to simply reduce recent developments to some of the violent and controversial acts that have been committed. The vast majority of the demonstrations, while certainly disruptive, have been peaceful and civil. The disparity in the nature of recent events can only be understood as a function of the diversity present in the participants: primarily led by the families of the missing students, protests have been composed of students, teachers, rural workers, union members, activists, and other citizens who are fed up with the system or their government in general. They span a wide range of ages, political allegiances, and socioeconomic status.

It is no mystery then that different manners though which individuals express discontent have been present in the demonstrations, and that the most violent acts are the ones grabbing the headlines. It is worth mentioning that that the families of the missing 43 have denounced violence and called for peaceful discourse in the name of their children. Moderates have been quick to brand the violent acts as outliers or committed by agent provocateurs, with the intention of committing crimes that would in turn justify a government clampdown.

The reality of the situation is likely somewhere in the middle. The presence a large number of individuals who have come to see violence as the only means through which the system can change cannot be ignored. Many Mexicans are tired of the corruption and impunity that plagues the nation, and have long since come to see violence as the only method by which they can achieve what their institutions have proved incapable of delivering on their behalf. Although I do not share this viewpoint nor support those that do, it would also be irresponsible not to acknowledge its existence.

Social movements occur frequently in Mexico, but rarely result in meaningful long-term change. The ongoing protests, though large and consistent in their numbers, presently lack mechanisms that can ease the achievement of their goals. Despite the current momentum, a lack of unified leadership threatens to dilute the potential of the demonstrations to achieve lasting political and social change. It also allows independently committed acts—such as acts of violence—to be easily attributed to the movement and therefore undermine its legitimacy. An identifiable group of protest organizers could shape and organize the movement, offer a clear view of what it intends to do, and draw clear distinctions between the acts of protestors and those who would undercut its message through violence. Above all, a unified leadership is necessary for the development of social activism to converge into a political alternative that citizens can support. Although a large segment within the society rejects the effectiveness of current institutions, the only way capitalize on protests to institute change is for them to mobilize inside the political arena, and play the game.

Given the serious deficiencies in the answers provided so far by the federal government in the Ayotzinapa Case, the controversy surrounding the Peña Administration, and indignation over recent clashes between police and students inside Mexico’s National Autonomous University (UNAM), major marches are currently planned to coincide with the anniversary of the Mexican Revolution this November 20. The parents of the missing students are calling on citizens to join in solidarity and to march with them toward the city’s central square. Separately, students are also calling for actions to block access to Mexico City’s International Airport to coincide with the demonstrations.

While calling for the demonstration to remain orderly and civil, President Peña has reminded the nation that the state ultimately has the right to restore order by force. The eerie message reminded many of former President Diaz Ordaz, the former PRI president that notoriously suppressed a student movement by force.

As calls for the president’s resignation build and are analyzed by the press, one thing undoubtedly remains clear: there is a deeply rooted discontent currently manifest in Mexican society regarding the state of the nation and its trajectory. In a country chronically afflicted by violence and unrest, Ayotzinapa has painfully struck a nerve. The protests reflect popular desperation, and stem from events caused by institutional decay. A growing number of Mexicans are exasperated by a system that, out of his own political ambition, Enrique Peña Nieto ultimately heads. The president must remember that not even the most ambitious reforms can flourish without order, the rule of law, and the consent of the citizenry. As his legitimacy slowly erodes, Peña is increasingly facing a situation that might prove to be the defining moment of his legacy.

Photo by Presidencia de la República Mexicana