McALLEN, RGV – Were you ever promised rewards for each grade of “A” you earned in school? Did you ever have an employer promise an award to workers for achieving an outcome?
We know incentives can motivate individuals in various contexts, but the process of implementing coordinated economic incentives at a regional level is more complex. Mexico has taken a big leap forward to incentivize its energy industries. Now South Texas and the Rio Grande Valley are in positions to move forward.
Douglass North, economic historian, stated “institutions form the incentive structure of a society and the political and economic institutions, as a consequence, are the underlying determinant of economic performance” in his 1993 Economics Nobel Prize lecture. Institutions are the ‘rules of the game’ in economic, political, and social interactions. Quite often, loci of political groups in countries can shape institutions toward the benefit of particular regimes, not for the citizens’ welfare. As a consequence, economic growth can suffer. If political regimes have incentives congruent with goals of economic efficiency and have the power to create change, economic performance can be improved.
Mexico has moved swiftly and deliberately to reshape its energy industry. Last month, Mexican President Enrique Peña Nieto signed into law a collection of laws to radically transform the country’s electricity, gas, and oil industries, a task completed within two years of entering office.
Mexico’s electricity industry only has one nuclear power plant and small amounts of power generated by hydroelectric and renewable energy sources. Most of the country’s electricity is generated from natural gas, which will become ever more important as new generation capacity is built that uses natural gas. Significant natural gas reserves exist in Mexico, but it continues to be a net exporter of natural gas. Of primary interest to developers is the Burgos Basin in northeastern Mexico containing shale gas resources. Mexico is already a top-10 producer of oil and has positive net exports, but total oil production has been on the decline in recent years although reserves are high.
Mexican policy makers recognized the need for sustainable economic growth and the role of energy development as a key component. There were incentives for economic reform in its energy industries, with many reforms creating incentives for market participants. The new laws enable outside opportunities for gas exploration and production, including sophisticated drilling for shale gas. In addition, the regulatory reforms create opportunities for foreign investment to facilitate drilling and processing of hard to reach oil reserves. Competition is gas and oil is now a reality, as domestic firms will be able to compete directly with entrenched state-owned energy firm Pemex. Also, private participation will be allowed in electricity generation and distribution as opposed to only having state-owned operation.
Mexico has been innovative in reforming its energy industry to improve economic efficiency. Many challenges remain for the Mexican government, including the development of infrastructure in the dry, rural areas of northeastern Mexico to building supply-chains in the energy industry to ensuring transparency and efficiency of operation with new government entities affiliated with the energy industry. New incentive plans will be needed to improve opportunities for success.
South Texas and the Rio Grande Valley will be a part of Mexico’s future in the energy industry. In a previously published column (“Energy Renaissance Coming to South Texas”), the Honorable Juan “Chuy” Hinojosa summarized how South Texas and the Rio Grande Valley are located in the middle of an energy revolution, between the burgeoning development of Eagle Ford Shale to the north and the Burgos Basin to the south. The Senator has been asked to chair a subcommittee investigating the economic impact of energy exploration in northern Mexico while assessing opportunities for cross-border growth and business collaboration.
South Texas College (STC) and Instituto Internacional de Estudios Superiores (IIES) will co-host INNO’ 2014, a binational innovation conference on cross-border economic development related to energy innovation. The conference is a two-day event with the second day of activities being held at the STC Technology Campus (Building B-Atrium) from 8:30am to 2:00pm on Friday, September 26. The agenda includes presentations and panel discussions covering economic conditions for the region, port innovation, economic development innovation, and a financial perspective of energy innovation. The keynote speaker, Mr. M. Max Yzaguirre of the Yzaguirre Group, Inc., will present “Mexico’s Energy Reform and Its Impact on Local Economic Development’.
Implementation of coordinated incentives at a regional level isn’t easy. South Texas businesses, financial institutions, policy makers, economic development organizations, institutions, and educators will need to be innovative. Input from the general public is needed. INNO’ 2014 will create a forum to envision a future for South Texas and the Rio Grande Valley in what Senator Hinojosa calls an “energy renaissance.” Questions on conference registration can be directed the STC Business Administration Department at (956)872-2764.
Salvador Martinez, Ph.D. is an economics instructor at South Texas College and co-author of “Alternating Currents: Electricity Markets and Public Policy”, a book analyzing issues regarding the opening of electricity markets. The views contained in this column belong to the author and don’t necessarily represent South Texas College.