Fueling Elections in Mexico and Brazil

What could the results of Mexico and Brazil’s upcoming elections have in store for energy policies and the oil industry?

April 20, 2018

This oil platform off the coast of Brazil produces 180,000 barrels a day. (Wikimedia Commons/Agência Brasil)

Latin America is home to seven presidential elections and transitions this year, including its two largest economies, Mexico and Brazil. Both countries suffer from chronic inequality, the militarization of domestic security, high levels of violence, and economic policies that favor the wealthy. But as two highly corrupt and thoroughly unpopular governments reach the end of their terms, voters also have an opportunity to halt the rightward shift in the region’s politics. While much is at stake, both countries are at a crossroads over their respective energy policies. Both Mexico and Brazil have pursued some form of privatization in their energy sectors in recent years, selling off oil reserves to the highest bidders. Could viable leftist candidates in both countries offer alternatives visions to the fossil-fueled status quo?

AMLO—Not Quite Lázaro Cardenas

Andrés Manuel López Obrador, or AMLO, a former mayor of Mexico City who is running for president for the third time, is the frontrunner in Mexico’s July presidential election. He leads the break-off group Movimiento Regeneración Nacional (Morena), after leaving the Partido de la Revolución Democrática (PRD) in 2012. One of the cornerstones of AMLO’s candidacy is a pledge to roll back the partial privatization of Mexico’s energy sector. Mexico kicked out foreign oil companies more than seven decades ago, and national control over the country’s natural resources has long been a source of national pride. Ending state control over Mexico’s energy sector was extremely controversial when President Enrique Peña Nieto pushed it through in 2013 and 2014 via a constitutional amendment, and polls show sizable majorities have opposed the move ever since. Since the reform passed, Mexico has sold off drilling rights to multinational companies, awarding 107 contracts over the course of the last three years, marking the first time that foreign companies have entered Mexico to drill since then-President Lázaro Cárdenas nationalized the oil sector in 1938.

Mexico’s oil fields are aging and have been in decline for years. However, there are still areas in the Gulf of Mexico that state-owned oil company, Pemex, has been unable to develop. Royal Dutch Shell and Chevron, among others, have had a longstanding presence nearby in U.S. waters, but Mexico’s energy privatization has opened up new areas for extraction. These oil companies have been eager to grab acreage in Mexico. In January, Shell acquired nine of the 19 Gulf of Mexico blocks offered in a deepwater auction, the most significant offering to date. Mexican officials boast that its January auction could eventually yield $93 billion in spending from a variety of oil companies, although because that figure assumes all companies who bid will decide to move forward on drilling, the actual level of investment could end up being much lower.

Still, the Peña Nieto administration has been scrambling to hold as many oil auctions as possible until he turns over power over fears that a new leftist government could end the process. The government has long hoped the fruits of privatization would be plain to see. Yet as the benefits of privatization remain elusive, the costs of the Peña Nieto’s energy reform have been visceral. In early 2017, protestors took the streets when the government phased out gasoline subsidies, which led to a spike in prices. The so-called gasolinazo saw gas stations burned and clashes between protestors and police across the country.

While the idea of ending subsidies for fossil fuels is laudable, it was certainly not enacted as a way to encourage alternative energy development or use. The abrupt nature of the phase-out was viewed by much of the Mexican populace as proof of President Peña Nieto’s corrupt neoliberal energy agenda, which saw the nation’s energy reserves sold off to multinationals combined with price hikes for average people without other policies to mitigate the fallout. 

It is fitting, then, that Andrés Manuel López Obrador, who counts Lázaro Cárdenas as one of his heroes, could move into Los Pinos on the 80th anniversary of the original nationalization of Mexico’s oil. AMLO’s fierce opposition to the privatization of the energy sector in the past has stoked fears in the oil industry that their assets could be seized. However, despite his past revolutionary fervor, AMLO has recently signaled he would stop far short of renationalizing Mexico’s oil reserves. Part of this is an electoral strategy to court business elites, or at least temper their opposition by reassuring multinational oil companies that their assets will remain untouched. “We in Morena are open to investment, we are open to the world,” Congresswoman Rocio Nahle, top energy advisor to AMLO and presumed energy minister, said earlier this year.

This watered-down energy agenda is also a recognition of his limits on power. While he enjoys a wide lead in the polls, AMLO’s Morena party probably won’t have majority control of the Congress, and because the privatization was made possible by a constitutional change, ratified by a majority of Mexican states, AMLO can’t simply undo it by decree. Peña Nieto and the PRI have likely succeeded in locking in the energy reforms, even if they remain unpopular.

What, then, will the government of López Obrador do? AMLO’s energy agenda, such as it is, also leaves much to be desired. The cornerstone of his agenda calls for massive public spending on oil refineries, with the intention of processing Mexico’s gasoline domestically, rather than relying on the United States for imports. He aims to end Mexico’s crude oil exports, diverting the country’s oil production for domestic consumption.

He has also stated that he would put a halt to the oil auctions that have been a key feature of the Peña Nieto era. “I’m going to ask [Peña Nieto] that he doesn’t hand out any more oil blocks, neither onshore or shallow waters, and that he puts a stop to the privatization of oil and electricity sectors,” López Obrador said in March.

But, even on this he has wavered. AMLO has tapped Alfonso Romo, an agro-industrialist, to open doors with the business elite. Romo has tried to soothe oil companies and their investors and assure them that their money is safe. “There won’t be any legal violation or anything else that would disrupt investor confidence,” Romo told Bloomberg. “What we’ve seen from the bidding process is that they’re very good for the country, they’re well done, and up until today we have no complaints.”

AMLO has raised expectations of a radical departure from the current government, which has stumbled over itself to curry favor with multinational oil companies. He may slow the pace of Mexico’s energy privatization, but his alternative strategy is to double-down on fossil fuels, pouring billions of dollars into oil refineries. In that sense, it will be more a continuation of the status quo, albeit with a nationalist tinge, rather than a more fundamental break with fossil fuel interests.

AMLO’s candidacy promises the most left-leaning Mexican government in decades. But, while that could lead to progress on many fronts, on energy policy, at least, he is likely to disappoint. Not only is AMLO not the next Cárdenas reincarnate, but he seems set to use massive public sums to perpetuate Mexico’s fossil fuel dependence.

Fascism on the Rise in Brazil

The stakes are much higher in Brazil, both because the current race remains highly fluid and because the potential outcomes could take the country down radically different paths. The backdrop of the election is the imprisonment of former Brazilian President Luiz Inácio Lula da Silva, who has consistently led all other candidates in the polls.

On April 5, the Brazilian Supreme Court rejected Lula’s request to stay out of jail while he fought the case against him, likely ending his chances to stand for this year’s election. His confinement and disqualification could solidify the right-wing’s grip on power, but the simultaneous aggressive ascent of a far-right fascist movement has brought back memories of military rule.

These are not mere flirtations with authoritarianism or nostalgia for the dictatorship. The head of the Brazilian army took to Twitter just days ago to all but threaten a coup if the court didn’t send Lula to prison. The military is putting its thumb on the scales to block the most likely candidate to win the election in October, paving the way for the return of the far-right to power.

It is instructive to revisit how we got here. Frustrated after watching the left-of-center Workers’ Party (PT) win four consecutive presidential elections, and embarrassed by the far-reaching Lava Jato corruption scandal and criminal investigation involving state-owned oil giant Petrobras, construction giant Odebrecht and politicians in several political parties, the Brazilian Congress impeached and removed former President Dilma Rousseff in 2016. It was a legislative coup, a seizure of power by politicians who were guilty of crimes of greater magnitude than those of the President they were removing. The longest recession in Brazil’s history—in part the result of an oil market meltdown that began in 2014—in which GDP contracted by nearly 8 percent, helped the rightwing curry public favor to oust Rousseff.

With the PT out of the way, the administration of President Michel Temer wasted no time in privatizing key aspects of the oil industry. Back in 2010, after Petrobras discovered a handful of massive oil discoveries off the coast of Brazil underneath a thick layer of salt, the government passed a law requiring the state-owned oil company to lead all pre-salt projects while also controlling at least a 30 percent stake. But years of mismanagement, corruption, and wasteful spending resulted in Petrobras repeatedly falling far short of its oil production goals. The collapse of oil prices in 2014 left the company deeply indebted, and it pushed the commodity-dependent Brazilian economy into recession.

The recession, high levels of debt, operational problems and, of course, the corruption probe into Petrobras provided a powerful justification for a dramatic overhaul of the energy sector. Shortly after Rousseff’s removal, the Brazilian Congress and President Temer repealed the requirement for Petrobras to lead on pre-salt oil fields and control a 30 percent stake. That opened the door to international oil companies, who have come rushing in to grab their piece of the pie.

The presidential election this year offers starkly different paths forward for Brazil. The extreme right-wing fascist Jair Bolsonaro stands to benefit immensely from the absence of Lula, which is exactly why the military and right-wing allies in the Congress and the judiciary want the former president locked up. Bolsonaro is a racist authoritarian who has expressed fondness for Brazil’s past military rule. He has previously made explicit calls for a return to dictatorship.

However, he has also expressed support for some orthodox neoliberal policies in an effort to woo investors for his candidacy. In a trip to the U.S. late last year, he signaled support for mass privatization, although demurred on whether or not he would privatize Petrobras. “Strategic sectors,” such as energy and mining, should be “carefully regulated,” he told Bloomberg News, and while he was open to privatizing Petrobras, “we shouldn’t start with it.”

More recently, Bolsonaro tapped Paulo Guedes, a founder of a private equity firm in Rio de Janeiro, as his top economic advisor. He is a fierce proponent of privatizing government-owned companies and gutting the safety net. “The last 30 years were a disaster—we corrupted democracy and stagnated the economy,’’ Guedes said in an interview with Bloomberg. “We should’ve done what the Chicago Boys instructed,” he said. Bolsonaro has shifting economic positions, but has said he would rely on Guedes for advice on economic policy.

Against this backdrop, it seems likely the business class will throw in with Bolsonaro. Just as with Wall Street and Donald Trump, investors will learn to live with boorish behavior so long as the profits keep rolling in. Austerity, privatization, attacks on environmental protection, and militarization of the law enforcement—for corporate executives, there’s a lot to like.  

On the energy front, then, we can expect more of the same, taken to its logical conclusion. But Bolsonaro’s election is not a foregone conclusion and the race will likely remain fluid with Lula probably out of the picture. The question is if PT supporters, centrists, leftists, and other disaffected voters will be left in disarray or if they can rally around another candidate. Centrist Geraldo Alckmin, who has been likened to “Brazil’s Hillary Clinton,” promises an uninspiring establishment agenda—with calls for the privatization of Petrobras – in an anti-establishment race, and has not been able to gain traction as of yet.

It will therefore be critical for the Left to coalesce around an alternative to Lula should he be forced out of the race. Who will emerge from the PT to fill the void left behind their standard bearer remains to be seen. Leftist candidate Ciro Ferreira Gomes of the Partido Democrático Trabalhista (Democratic Labour Party, or PDT) has promised that if elected, he would nationalize energy assets purchased by private companies. He has consistently polled in the high single digits for the presidential election, and was thought to benefit with Lula forced out of the race. However, he slipped in the most recent figures from polling firm Datafolha, published in mid-April.

A more likely and hopeful alternative could be Marina Silva of the Rede Sustentabilidade (Sustainability Network). Silva, a former rubber tapper, activist, Senator and Environment Minister, came in third in the 2014 presidential election. She has long championed the environment and would likely scale back oil production in favor of renewable energy. As Brazil’s Environment Minister between 2003 and 2008, she presided over a period that saw dramatic declines in deforestation rates, and ultimately resigned in protest over the Lula government’s support for large-scale hydroelectric dams, agribusiness, and other industrial policies that threatened the Amazon.

The latest polls from Datafolha, the first look at voter data following Lula’s imprisonment, show that Bolsonaro and Marina Silva are virtually tied, with 17% to 15%, respectively. January polls had her in single digits. The most recent results suggest Marina Silva could capture PT voters with Lula out of the race. Notably, the PT’s likely replacement, former São Paulo Mayor Fernando Haddad, recorded a marginal 2% in the poll.

More importantly, Silva would likely prevail over Bolsonaro in the second round by a margin of 44% to 31%, respectively. This suggests a wide swathe of Brazilian voters would rally around a pro-environmental agenda when pitted against a fascist one.

Latin America at a Crossroads

Alongside Mexico and Brazil, Latin America will hold 15 oil and gas auctions in 2018, which could result in a record high sale of oil blocks this year. Expansion of the oil industry and its privatization seems to be on the march across Latin America. Argentina, under neoliberal favorite Mauricio Macri, is desperately trying to replicate the U.S. shale drilling frenzy. Uruguay has also recently reformed its energy rules to attract oil companies, with a planned auction this month. Guyana, meanwhile, might become the world’s next petrostate, with ExxonMobil threatening to swamp the small country with an influx of cash as it develops its major discoveries offshore. Meanwhile, Colombia’s presidential frontrunner, Ivan Duque, the right-wing ally of former president Alvaro Uribe, has proposed minor reforms to reroute oil revenues to extraction zones, while calling for higher oil production levels. His closest rival, Gustavo Petro, has advocated an economic model that does not depend so heavily on oil and gas, but he is trailing badly in the polls. And Venezuela’s petro-state still clings to its long-weathering dependence on oil with the country’s economy in shambles. 

Yet, the fossil fuel bonanza is not inevitable, and there are some hopeful signs of pushback. Shale drillers in Argentina are facing stiff resistance from Mapuche who are fighting to protect their ancestral lands. The Colombian Supreme Court just ordered the government to halt deforestation. Renewable energy is making inroads across the region.

Most importantly, the prospect of a leftward shift in both Mexico and Brazil has many in the oil industry on edge. “There is indeed a feeling that these could be the last [auctions] for a while,” an oil executive for a company registered to bid in both Mexico and Brazil told Reuters in March, ahead of oil auctions in both countries.

These elections are the largest opportunity in years to change course. While it doesn’t exactly represent a second Pink Tide, a shift to the Left has the potential to halt the onslaught of oil and gas in Latin America’s two largest countries. López Obrador’s likely victory is significant as it demonstrates that a plurality of the population is ready to grant power to a leftist candidate. However, the absence of clear vision to transition away from fossil fuels from AMLO threatens more of the same on the energy front. In Brazil, the risks are more severe. The election of a fascist government, worrying on many levels, could also further entrench the primacy of fossil fuels. Faced with a return of military rule, however, much of the population could unite against fascism.

Nick Cunningham is a freelance writer covering oil and gas, renewable energy, climate change and international politics. He is based in Pittsburgh, Pennsylvania.

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