"Mexican President Enrique Pena Nieto signed into law on Monday new rules governing a historic opening of the state-run oil, gas and electricity industries to foreign and private companies," said Energy Secretary Pedro Joaquin Coldwell, according to The World Post. Coldwell added the new laws will allow Mexico to deal "with realities of the 21st century."
Investors should note that Mexico actually altered its constitution to allow this "change in the energy paradigm." Similarly, Japan altered its constitution this year allowing it to expand its Defense sector. Constitutions are not changed without compelling reasons. Make no mistake, the effort demonstrates a fear for the survival of the State itself. Here we have two major countries altering their laws to address DEMAND - one in Energy and the other in Defense - that, left unaddressed, clearly threatened their survival.
Back to Mexico: Pena Nieto dismissed generations of national pride in domestic Energy saying of the reforms, " ... we have overcome decades of immobility, and overturned barriers that prevented Mexico from growing." That was quite an admission of failure on his part.
Now that past nationalization is seen as the impediment to progress, Nieto gave his vision: "With this reform we can extract oil from deep waters and take better advantage of our vast deposits of shale gas, to generate electricity at lower prices" (emphasis mine), and added: "One of those barriers has been the high price of gas (emphasis mine) — much of it imported — and electricity rates that are higher than in many parts of the United States."
We don't hear much in the US about lowering Energy costs. The average price of a gallon of gasoline, inflation-adjusted since 1918, is $2.60 per gallon. So anytime the price of gasoline is above that cost, gasoline is considered "expensive". The amount over $2.60 is considered the "premium" and understood to be an added tax to the consumer. The average price of a gallon of gasoline in America today is $3.75 (it's been as high as $4.90). It is this premium for gasoline (over $2.60/gal) that is stagnating the US economy, and by extension, the world's economies. It is the real reason why the American economy cannot generate jobs and continues to shed them. It is why DEMAND for non-essentials is falling.
Could you imagine if our own leadership were to announce the goal of reducing the pump-price to $2.25-$2.50 per gallon? The futures market would send the cost of WTI to $60 BBL in no time. The DEMAND for all goods and services would skyrocket and the world would literally change overnight. But that cannot happen as discussed here, here and here.
The Mexican president's words were meant to encourage the populace and provide cover for his historic move, but Pena Nieto knows Energy prices cannot fall. It is, in fact, why he's making the move now - Mexico intends only to take advantage of the higher prices with foreign investment capital and expertise. But investors should understand why Energy prices, regardless of DEMAND, must continue to rise.
If you want to know more about how the MDEF™ Investing strategy is positioned in this, or other geopolitical possibilities, please contact us directly.