EconoMonitor

Policies of Scale: Efficient Global Policy

For the Three Amigos, It’s Time to Face their El Guapo

President Obama  is on his way to join Canadian Prime Minister Stephen Harper and Mexican President Enrique Pena Neito in the bustling city of Toluca, Mexico, for the 2014 North America Leaders Summit. The meeting could not come soon enough for the “Three Amigos.” In the 1986 movie, “¡Three Amigos!,” Steve Martin’s character explains how everyone has an “El Guapo,” the antagonist, to overcome:

“In a way, all of us has an El Guapo to face. For some, shyness might be their El Guapo. For others, a lack of education might be their El Guapo. For us, El Guapo is a big, dangerous man who wants to kill us.”

The “Three Amigos” have thrived under NAFTA for twenty years now, but the agreement is fatigued and in a number of “El Guapos” are holding North America back from achieving more. One glaring El Guapo is in energy, where NAFTA is failing to leverage the energy power of each Amigo. The Summit ought to spark a serious discussion about how NAFTA can and should be improved to help propel North America into yet unseen economic prosperity and energy security.

Energy abundance is driving North American economic growth and excitement about continental energy self-sufficiency. Hydrocarbons now represent the biggest chunk of American’s exports while in Canada energy accounts for nearly 20% of exports and Mexico, though proposed reforms allowing foreign involvement in energy, seeks to help its struggling energy sector by modernizing its technology and processes, allowing it to tap more of its very large reserves to move up the production rankings and improve the economic condition of its people.

The global trends look good, too. As early as 2015, the International Energy Agency says the United States will surpass Russia and Saudi Arabia as the world’s top oil producer. Although it will not last long on America’s paltry reserves compared to those found in these two countries, British Petroleum is projecting that in 2035 America’s production will still be enough to combine with that of Russia and Saudi Arabia to supply 35% of the world’s liquids demand. On the natural gas side, when domestic consumption will overwhelm domestic production by a factor of eight in 2035, the US will supply 20% of global natural gas needs.

The continent’s other two countries will contribute to the global energy market in big ways, too. Canada will continue producing large quantities of crude, and Mexico’s praiseworthy regulatory liberalization effort, if successful, will make Mexico a much bigger player in the market as energy contributes to massive economic growth at home. And to put a cherry on the top of the continent’s energy sunday, ExxonMobil is predicting that North American shale oil production alone will be enough for it to jump ahead of every OPEC producer except Saudi Arabia by 2016.

Yet this future not guaranteed because a number of factors, domestic and continental, present very real road blocks. A number of outstanding issues in the US like the growing disparity between America’s large amounts of light sweet crude and its low refining capacity of the same variety, the increasingly unfavorable upstream investment to profit ratio, and the antiquated crude export ban, could all hinder America’s long-term viability as the major oil producer it is projected to be. Canada’s oil is very expensive to produce, and a decline in the global price could price its oil out of the market. Further, the infrastructure log jam and mismatched refining in the US, which receives 98% of Canadian exports, threatens Canada’s energy sector as well. And Mexico’s liberalization effort could stall.

On the continental level, the NAFTA energy chapter has fallen behind the pace of the private sector and global market forces and is now holding North America back from achieving its potential. From differing standards to siloed private and public planning, the lack of cohesion across the three countries comes at a time when smarter integration is a force multiplier. If the governments do not get on the same page and create regulatory frameworks and long-term goals that take into account a new state of mind centered on today’s abundance rather than yesterday’s scarcity that dictate current regulations and goals, the boost we are enjoying from our energy resources will slow down well before those resources are maximized.

While there is more to do than update NAFTA, doing so would be a proper first step by laying out a regulatory path and shared commitment that gives the energy sector the long-term confidence it needs to make investments and fulfill North America’s energy promise. The first update to NAFTA ought to be the creation of a trilateral commission that studies and coordinates cross-border energy issues. This idea has already been endorsed by prominent business communities in all three countries and has support across the policy community. Such a commission can coordinate the complexities and plans for energy infrastructure projects to achieve a seamless and efficient delivery of energy across borders. Further, it would provide a forum to align a number of regulatory standards for electricity grids, renewable energy, appliance efficiency, and energy generating and distributing technologies, so that the same BTU of energy, be it from oil, natural gas, coal, or renewables, can be used anywhere, by anyone.

These and other factors are difficult to address today because of the disconnect between the realities of the energy sector and the disjointed country and continental regulations that govern it. Outdated governance is artificially delimitating the potential of energy to make the 21st Century North America’s to own. The North American Leaders Summit presents a great opportunity for the Three Amigos to set the continent on better economic and energy security paths by getting on the same energy page and establishing new governance that harnesses the full potential of our energy.

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