 This is Think Tank Hawaii, the community matters here. Okay, Energy in America, that's Lou Puliarisi. He joins us from Washington, D.C. He's the CEO of Ebrink, which is an energy policy research Think Tank, and he's, well, I'm so happy to see him. Hi Lou, welcome back to your show. Hi. Great to be here. So you have a conference coming up in Mexico City in a few weeks involving mostly petroleum but energy in general in Mexico, and we sure want to know about, we just had a show with our old correspondent, Carlos Suarez, he's with the University of Puebla, which is right near Mexico City, and we're talking about international relations and what's happening there, and it's really interesting stuff. But so is energy, energy is always interesting. So can we talk about Mexico and energy today? Yeah, so let me start with some background on why this is very important to the United States and actually to the broader North American hemisphere. In, prior to the election of AMLO or, you know, Andre Manuel Lopez Obrador. Nice. Who is the new president, yes, who is the new president of Mexico, who's quite an interesting character. He defeated the long standing institutional revolutionary party or the PRI, and he has done lots of interesting things. The first thing he has done is, the competitive process for the development of new power plants, including solar and wind, the resistance against Yankee imperialism back to the 30s, and so he took on all, the PRI took on all these things. Yet, even though by any outside observer would say, this was an open, very productive, very rational process for Mexico, the PRI could not overcome a legacy of corruption and they lost the election. Not only did they lost, lose the election, they got wiped out because AMLO has control of his party or his party coalition controls the legislature as well. And in fact, before the election, I was invited to Mexico with the head of the Oxford Institute of Energy Studies to talk about energy reform and oil and gas development with the different political parties. And it was a quite interesting event. We went down there and my colleague from London had like 45 technical slides. And we met with Overdor, Overdor's people and he said, okay, I can't go to this meeting guys, but I'm going to Mexico City. I mean, I'm going to Ata Monterrey, but you go in the room there and you'll have a very substantive discussion. And we got in the room, there's like a thousand people. They invited the party regulars to pre-launch. There are kids running around in front of the stage. So I told Boston, I don't think you're going to be able to use your slides for this group, you know. So actually, if you haven't been in Mexico City, I really recommend it. It's very interesting, very dynamic, a lot of interesting things going on right now. Well, tell us about energy in Mexico. What's the status? So I think that you have this enormous reform that's taken place over the last four years. And because, quote, the other guys did it, it must be bad, okay? So the new administration under AMLO, right? We have that in the U.S. a lot. And remember that to change the Constitution to do this. It's not a small thing that was accomplished. And so AMLO has been very, we had a lot of derogatory comments. He's been very dismissive of the energy reform. And so one of the efforts that I think we're going to participate in is a kind of, okay, what do we as upside observers think about this issue? And for anybody in your audience who might be interested, we've just issued a paper on Mexico and they can pull that right off the website, which discusses what is the value of the new energy model or the model that was introduced over the last four years in the last administration. I thought that's what we would talk about tonight and what it means for some of the ambitious plans AMLO has for Mexican energy, but also what he has in terms of his relationship with the United States. So that paper is on eprint.org? Right. E-P-R-I-N-C.org, okay. Right, and it's a big paper on Mexico. Very easy to read. So you mentioned before the show that your involvement, your panel, your presentation in this conference here in a couple of weeks, largely on petroleum, but can you tell us the balance these days of solar and wind, I suppose, and other things against petroleum in Mexico? So, of course, I just give you the statistic. Everyone talks about solar wind. Everyone loves solar wind. It's a great thing that it's not now. Great percent of the energy in the United States is generated by swim and solar, okay? Don't get too excited. It's not making a big difference yet. And in Mexico, it's the same thing. It's going to be helpful. It's going to play an important part in the future of Mexican energy, but right now the big environmental payoff in Mexico is to stop burning the oil and try to substitute natural gas. That's where the U.S. comes in, because we are a very big supplier of natural gas to Mexico. We are also a very big supplier of petroleum products, including gasoline and diesel. So does Mexico have indigenous oil? Does it have indigenous gas? It does. In fact, maybe we should go to the first slide. Sure. First picture. The first picture shows how important is the petroleum sector as a percent of gross domestic product in Mexico? And the thing to keep up with Mexico is that their petroleum production has been falling for years. That's why they did the reforms. Because Pemex just did not, you know, Pemex was starved by money by the government. The government used it as a piggy bank and didn't really invest enough. And you can see here that you go back to 1995, the national economy of Mexico, the problem was pretty important. It was about 14%, 13, 14%. But over time, both the direct and indirect activity has declined to close to 8%. So petroleum is not as important to Mexico as it used to be. And what many people don't understand is that Mexico is an energy user. It is, in all respects, a modern industrial country. It produces lots of capital goods, lots of automobiles. It has a lot of industrial activity. Yes, it's a country with a lot of income inequality, a big difference between the North and the South. But it is a big energy user. A very important industrial economy in the northern hemisphere, in the western hemisphere. 122 million people. That's the kind of background. 122 million people. Right. And many of them are, and it's a very young population. So it's a very dynamic place. And actually, I'm pretty positive about the future for Mexico. There are lots of problems, but I think people don't see the upsides often in the past. So that sort of gives you the background of where we are. And one of the new energy model, which that was the sort of instrument of the last administration there, was really trying to direct this falling oil production, falling gas production, the inadequate infrastructure for distributing gasoline, et cetera. So if we go to the next slide, I think it shows you a kind of how to think about the Mexican economy. I trade, repairs, transport. It is in many respects, in all respects, it is a modern economy. I think we don't really understand that. And it's a kind of, right there, it's an important economy in the Pacific Rim. And I believe, I'm not sure if they've signed up for that. They're not part of the TPP yet, but I think they're looking at it. Okay. Let's go to the next slide. So the next thing is, so why is this important? Why is this new energy model and this reform important? And you can see here that there's a picture that shows you on the blue line in billions of dollars, right? The government tax revenue, that's the blue line. And government tax revenue in Mexico since 2010 has risen substantially from 250 to nearly $400 billion. But the revenue generated by Pemex, the state oil company, has continued to fall. And one of the big areas of contention now is, AMLO has said, look, I think it was a mistake to do these energy reforms because we need to give this money to Pemex, right? We need to get Pemex to have this money, the state oil company. They can do this job. But the evidence suggests that if you look at Pemex payments to the government since 2010, they're not really doing a very good job. They're not generating a lot of cash for the government. And so I think there's a sense, my sense is a lot of a new team from AMLO, much like you see in the U.S., they don't really know much about this issue yet. They come in with a series of assumptions, a kind of perspective. But that perspective has not been validated by any research or facts. So one day they're going to realize that the state oil isn't making any money, and what? They're going to have to do something about it in favor of non-state oil now. Yeah, so I'm doing it. So that's actually a very important issue. One of the reasons we wrote this paper was, and actually the paper's called What is the value of the new energy model to Mexico? Not to the U.S., to Mexico. How should they think about those reforms that took place? Because from a public policy point of view, we think it's a mistake for them to abandon those reforms. Of course they're new in town, so to speak. They have their own ideas. And they're going to have to sort of figure this out themselves. But the evidence suggests that these reforms, even though they were implemented by the PRI, they were implemented by the other guys, they're not necessarily bad. Actually they have a lot of potential, and they have a lot of potential to help Amlo on the basic thing he's worried about, which is getting cash to deal with income inequality. Is he independent of the energy industry, of the national energy company? Can he do what he wants? Oh yeah, he has a lot of authority. I think Pemex has a special place in the hearts of Mexicans. It's very much attached to the 1930s when Mexico nationalized the industry throughout the Yankee overlords. And so within Mexico, it's a really part of the national patrimony. So even making these changes in the last administration was an enormous effort. You have to change the Constitution, but they were able to do that. So actually I really think this is a terrific story because here's the PRI with this terrible legacy of corruption, which actually did the right thing over the last four years. But in the elections, they couldn't get past this legacy. And they went down. Well, at that point in the story, we'll take a break, Lou. That's Lou Pujirisi, the CEO of Eprink. And that's eprink.org. You can see the paper he was referring to on his website. We'll take a minute. We'll come back. And we'll hear more about how energy is evolving in Mexico and what he's going to talk about. And we'll see some more of his slides, too. We'll be right back. This is Think Tech Hawaii, raising public awareness. If you're not in control of how you see yourself, then who is? Live above the influence. When I was growing up, I was among the one in six American kids who struggled with hunger. But with the power of breakfast, the kids in your neighborhood can think big and be more. Go to hungeris.org to make breakfast happen for kids in your neighborhood. We're back with Lou Pujirisi. He's in Washington, D.C. Join us by Zoom, our remote technology. And we'll be back with more information about our community. I'm a local. This is Lou Pujirisi. I'm from the Pacific. I'm from the Pacific, and I'm from the Pacific. We're back with Lou Pujirisi. He's in Washington, D.C. Washington DC, joins us by Zoom, our remote technology, and we're going to hear more about energy in Mexico, not only petroleum, but also alternative forms of energy as well. So let's go back to your slides, Lou. What else are you going to show us in terms of? Okay, let's go to the next one. I think people have a – the next one shows petroleum revenue in various nations. It's a little exciting slide. And I think really the lesson I'd like people to see from this slide is that we do have a big economy like the U.S. or Mexico, and there's people like me talking about oil and gas. In fact, I don't think we really realize how big it is. The world oil market – oil and gas market probably transacts $4 trillion a year in commodities, right? So if you take all the gas and petroleum products and crude oil and the basic fundamental products that are made worldwide, that comes to about $4 trillion a year. It is a big, big business. It's not going to get rid of all oil and gas by 2030 when it's worth $4 trillion. It's going to take longer than that. So if you look at this kind of graph here, it shows on the vertical axis, right? Oil and gas exports as a share of total exports, you know? How important are oil and gas exports to the whole economy? And then along the horizontal axis, it shows you oil and gas revenue as a proportion of fiscal revenue. So if you're sort of thinking about this, let's start with the U.S. The U.S. is the biggest economy in the world, right? They are now the world's largest oil producer. But our economy is so big, right, that oil and gas exports as a share of our total exports is very small. And it's not that important to the whole revenue of the economy. We collect lots of money from lots of people in the economy. And Mexico is a little bit more dependent, but not much. So you see Mexico, Canada, the United Kingdom, all big oil players in one way or the other. But their economies are so big, it's not an overwhelming issue, right? Nigeria, Kuwait, the Arabs, you know, the traditional businesses in Venezuela, they are dependent on this commodity. And so that means within Mexico, it's not, it should be a kind of solvable problem. It should be able to get it more efficient. So if we go to the next one, I want to show you. Mexico and Canada are almost identical in that graph, yeah? So I guess that what that tells them, I mean, my recollection is Western Canada is pumping out oil and gas like there was no tomorrow. They have a huge industry and they know how to extract it from the tar sands up there. And the result is exporting an awful lot of oil from, it's the biggest industry in those two provinces, so both Calgary, rather Alberta and British Columbia, and so. We are their number one buyer. Yes. We are their only buyer, actually. Yes, yes, yes. But so that sort of puts it in perspective as against Mexico. Mexico must have a huge amount of oil and gas that it exports to. They're so close on the chart. Yeah, it uses a lot internally, but it exports a lot, mostly to the United States. So we have a very extensive two-way trade with Mexico. We are selling them a very large volume of pipeline gas. So the economic reform in Mexico, the allowing the market forces to drive out higher cost alternatives like oil or dirtier alternatives like coal. That's a good thing for the US because it provides an outlet for our natural gas supplies, which are big and growing. So could Mexico be independent, self-reliant on what it has? Why does it have to both import and export at the same time? So this is actually a great question because this is exactly what Amlo talks about. And that's why. So Amlo is saying, well, this is ridiculous. We have energy security. We should be buying all this gas from the US. Let's make our own gas. Or these gasoline prices are high because we're buying them from the US. It turns out that that is probably an incorrect statement. Petroleum products, gasoline are traded on the world market. And the new energy reform actually makes gasoline prices lower in Mexico. Chemics fail to make the investments in refineries and infrastructure. So Amlo has a proposal, $8 to $9 billion to build new refineries, build and expand a new refinery in Mexico. The question is, is that a good idea? And the question I asked when I was going to think about, is this the best use of that money? Maybe that money is better off for schools or something else. Because I think I can show you how that's not going to lower the price of gasoline. Oh, OK. And so that takes me to the next picture, right? The next picture shows you royalties from planned oil projects. Now, these are locked in. And these royalty payments, right? And the different colors are different oil fields throughout Mexico, all shore on shore. And one of the things I think the economic team in Amlo is not quite familiar with is, how much money is coming to them from the reforms of the new energy model, which lease these lands to private companies. And these private companies paid cash up front, plus a commitment to pay a percentage of their production in the royalty payment. And so what he's going to learn eventually is that he has a slug of dough by 2028, 26, 7, 8, over $6 billion. And so he has announced that I don't want to do any more of this private oil and gas development leasing. It's not good for us. We should do it. But of course, they use Mexican workers and stuff in this process. But if he has an ambitious plan to deal with income inequality in Mexico, he's going to need that money. And I think once they get familiar with this, it's going to be very interesting to see what they do. He's reorganizing a lot of things. One of the things we learned in our last show was about the airport in Mexico City. It's a multi-billion dollar remodel of the airport. And his predecessors set it in motion. And he's not going ahead with it. I'm not sure why. Yeah, but I don't know what he's going to do. Apparently, he says the bondholders are going to be paid. I don't actually have an opinion on the airport, whether it would be interesting to see whether your guest thought it was a good or a bad idea. I'm not sure. He didn't say so many words, but the question is raising. Why let a project go one-third of the way and then stop it? Exactly, exactly. So he's a very interesting character, so we're going to see. Now if we go, one of the things that I know all your guests, all your auditors is the environment. And I'd like to show you some of the environmental trends in Mexico. This gets to the utility sector again. If you go to the next picture, you can see these are Mexicans, Mexican sulfur dioxide emissions saved by expected natural gas production. So the reform process is going to yield higher levels of natural gas production in Mexico. And you can see here that fuel, oil, and coal are going to be used much less. So the red line shows you fuel oil and the blue line shows you coal. But as more US gas is produced in Mexico and actually more gas is imported from the US, the use of these two fuels begins to decline. It takes a bit longer than many people would like to see, but once again, it's not a substitute of renewables, if you like, or wind and solar for coal. But it is moving along a gradient which reduces sulfur dioxide emissions. And if you go to the next slide, it shows you the real choice for AMLO. The red line shows you the ministry of energy supply from the new energy reform. So these are two separate forecasts on what the reform measures instituted by the defeated party, the PRI, is likely to yield an additional oil production, and the... And that stops everything. Well, Trump says a lot of things, okay? Okay. Well, I don't know what to do with that. You know, that's not, yeah, that's a ridiculous thing, of course. Yeah, I always enjoy our conversations, though. And I really enjoy, you know, posing these questions to you and having your answers on it. It really is a tremendous education. So we'll do this again in two weeks, hence. I hope you'll be in a place we can reach you wherever your travels take you. Absolutely, absolutely. Okay, aloha, Jake. Aloha. Thank you so much. Who put your receipt? CEO of E-Prank.