While coming from opposite ends of the political spectrum, the administrations of US President Donald Trump and Mexico’s recently elected chief executive, Andrés Manuel López Obrador (commonly referred to as “AMLO”), have each heralded significant policy shifts with potential to affect bilateral relations as well as international energy markets.

The Trump administration’s trade and immigration policies have attracted significant attention, but the current US administration’s environmental policy shifts also pose the potential for significant impacts on global markets, particularly in the energy sector. Under the Obama administration, for example, the executive branch often opposed or heavily restricted energy projects on the basis of environmental concerns ranging from alleged impacts of unconventional oil and gas production (e.g., hydraulic fracturing, or “fracking”) to asserted climate impacts of fossil fuel combustion for electric power generation—both domestically and in overseas markets, such as China.

By contrast, the Trump administration has taken steps to scale back regulation of methane emissions from upstream oil and gas production and to expedite approvals of pipelines and LNG export terminals, including projects focused on natural gas export to Mexico and Asia. Thus while many Trump administration policies may have engendered uncertainty on the international front, some of its policies may provide greater stability for energy market participants, at least in the cases of Asia and Mexico.

Recent policy shifts in Mexico are equally dramatic, posing the potential for significant ripple effects on international energy markets given the nation’s strategic position as a major energy consumer, producer and (potentially) exporter. But the outcomes of these policy shifts are challenging to predict due to their recent nature and, at least in significant part, uncertainties introduced by Mexico’s new administration.

Until just a few short years ago, Mexico’s energy market was nationalized, with virtually all petroleum and electricity production under the control of Petróleos Mexicanos (PEMEX) (oil and gas) and Comisión Federal de Electricidad (CFE) (electricity), with little opportunity for private investment. In 2013, however, an amendment to Mexico’s Constitution (referred to as la Reforma Energética or, in English, the Energy Reforms) dramatically liberalized Mexican energy policy. Reforms adopted by the then-ruling Partido Revolucionario Institucional (PRI) included authorization for private, including foreign, investment in oil and gas exploration and production and transportation (e.g., pipelines and terminals) and for an independent electric power infrastructure that also allowed for private foreign investment.

Supporters justified privatization by pointing to the need to attract foreign capital and expertise and for an energy portfolio less impactful on the environment. Since the Energy Reforms’ adoption, the Mexican government has auctioned and awarded numerous oil and gas blocks to foreign companies in so-called bid rounds. Many private contracts have been awarded to expand the nation’s pipeline system and to supply imported natural gas to CFE, much coming from the US, providing lower-cost and cleaner electric power to spur the Mexican economy and reduce climate impacts. Ironically, it could be argued that its efforts to compel, or at least incentivize, foreign investors to comply with environmental regulations may be more successful than the historically ineffective attempts by the Mexican environmental regulators to overcome the casual environmental attitudes and practices of PEMEX and CFE.

During his recent election campaign, AMLO and his advisors were highly critical of these PRI-initiated reforms. With roots in rural southern Mexico and representing the populist Morena Party (Movement for National Regeneration), AMLO expressed skepticism of privatization and concern over impacts to indigenous communities. Following his December 1, 2018, inauguration, AMLO and his newly appointed ministers announced aggressive measures to reassess the 2013 Energy Reforms, including temporary cessation of the bid rounds, a possible fracking moratorium, criticism of gas capacity contracts it viewed as unduly burdensome on CFE, substantial investment in PEMEX refinery expansions, and reconsideration of private energy sector investment.

Not surprisingly, these developments have raised significant concern from Mexican and international observers. Many commercial parties and policy analysts have been quick to condemn AMLO’s initial policy pronouncements and predict adverse consequences on the Mexican economy and global energy markets. Based on experience in other jurisdictions, this criticism may be well-founded. But some observers caution that the predictions of dire consequences are premature, and other signs suggest AMLO’s government may be shifting toward a more moderate, pragmatic approach.

Among the signs the optimists cite are AMLO’s recent attempts to reassure private investors. For example, AMLO is reported as having attempted to calm commercial parties’ concerns by committing to honor existing contracts awarded in the bid rounds and to provide a three-year “truce” to afford investors an opportunity to demonstrate privatization’s benefits. AMLO’s Energy Secretary, Rocío Nahle, also reportedly assured the business community that the government will take a pragmatic approach in reassessing the Energy Reforms and emphasized the need to internationalize PEMEX.

Another sign that may portend pragmatism is the apparent softening of AMLO’s prior demand that foreign investors renegotiate gas supply contracts obligating CFE to pay for unused pipeline capacity. In more recent statements, AMLO reportedly assured investors that the government will abide by the existing agreements and refrain from taking legal action to force contract amendments. Further, while urging private parties to reflect on their civic responsibility when asserting contractual rights, AMLO also reportedly acknowledged the government’s responsibility to intercede with local communities where pipeline service had been interrupted by local opposition.

Moreover, given the steady decline of PEMEX’s oil and gas production (an unfortunate and perhaps unsustainable state of affairs politically as well as economically given Mexico’s abundant oil and gas reserves), the shortage of domestic expertise and capital necessary to resuscitate the nation’s energy infrastructure, and AMLO’s competing campaign promises to fund social programs for his rural constituencies, many analysts opine that the only pragmatic policy response available to AMLO’s administration is to ensure continuity of the 2013 Energy Reforms. In light of Mexico’s energy and economic underperformance and ongoing confrontation with the Trump administration over social issues, a decision to continue welcoming gas imports and energy sector investment from the US and other foreign parties also may help enhance AMLO’s political posture at home and abroad. Potential benefits to Mexico may derive both from encouraging mutually beneficial bilateral trade with the US and from affording Mexico’s new government an opportunity to reduce dependence on the US by strengthening diplomatic and economic relations around the world while standing firm on its domestic social governance commitments. On the other hand, if Mexico sees itself on the losing end of the contest with the US over social issues such as immigration, it may be more inclined to pursue increasingly punitive regulation and renegotiation in the energy sector.

In summary, while rationality does not always carry the day in the political realm, the costs of overly nationalistic policies likely outweigh the benefits for Mexico. Indeed, if the AMLO administration chose to attempt nationalization of the considerable foreign investment which followed the 2013 Energy Reforms in an attempt to stay true to its campaign rhetoric, it would not be surprising to witness Mexico’s rapid descent into international pariah status, following the unfortunate lead of other Latin American countries such as Venezuela (status unchanged), Argentina (desperately attempting to climb out) and Bolivia (somewhere in the middle).

The international energy community has become highly attuned to nationalistic rhetoric and has developed a short fuse and a long memory. Mexico boasts a rich culture of internationally educated, experienced and pragmatic policymakers and legal advisors, which some would argue is unequaled in Latin America. Much, if not most, of this experience is still in place; thus, it may be reasonable to adopt an optimistic view that prudence will carry the day. Given this dynamic state of affairs, while US reconsideration of immigration and trade policies coupled with Mexico’s vacillating energy transition creates uncertainty in the near term, in both cases many observers take the view that pragmatism will prevail—providing potential opportunity to those with a longer-term time horizon, a reasonable level of risk tolerance, and the experience and sophistication to navigate the shifting political sands.