Requiem or Revival?: The Promise of North American Integration

Chapter 11. The Politics of Energy Markets in North America: Challenges and Prospects for a Continental Partnership

With global energy prices reaching new heights since 2000, the United States has turned its attention more closely to the prospects for forging an explicit and cohesive energy policy that involves Canada and Mexico. The U.S. energy strategy up until now has bet on market mechanisms and blind faith that price incentives for Canada and Mexico will encourage the development of their unconventional and conventional resources in order to maintain the flow of energy supplies to the U.S. market . Although there is no consensus in North America on how to proceed with a continental strategy that pools the benefits and risks, the Security and Prosperity Partnership (SPP) of North America, an initiative launched by the three countries in 2005, calls for the design of a common policy framework for energy issues. Although the SPP could constitute the space within which the three countries of North America can work to better accommodate their respective interests in the energy field, I argue in this chapter that key policy decisions in the energy field will remain grounded in national and subnational priorities . A main obstacle to forging a continental policy is the fundamentally different approaches to energy development between Mexico, on the one hand, 211 The Politics of Energy Markets in North America Challenges and Prospects for a Continental Partnership isidro morales 11 11-8201-8 ch11.qxd 7/13/07 4:34 PM Page 211 and Canada and the United States, on the other. The U.S. strategy for enhancing energy security is rooted in a market-oriented model that seeks to establish incentives for developing conventional and nonconventional resources in an era of historically high oil prices. This strategy, which also envisions strong regulatory intervention and the development of nonconventional oil resources (tar sands, bitumen, and synthetic oil) in western Canada, fits well with Canadian energy strategy: Prime Minister Stephen Harper’s Conservative Party government in Canada stands ready and willing to deepen market integration in oil and gas markets with its southern neighbor, although regulatory and environmental concerns must still be better coordinated between the western province of Alberta, where oil sands lie, and federal agencies in Ottawa. Mexico’s energy strategy is worlds apart from that of Canada and the United States: the bulk of this sector remains under state control. Further, the future of Mexico’s oil and gas production is highly uncertain, with a divided federal congress and contrasting energy proposals put forth by the three major candidates who ran for president in 2006. These proposals raised the politically sensitive question of whether to open Mexico’s energy sector to private participation. The chapter begins with a discussion of how U.S. security and energy concerns have become more tightly linked since the terrorist attacks of September 11, 2001. The second section analyzes how U.S. strategy complements current energy policies in Canada, a country that has emerged as an oil power with the development of its huge nonconventional petroleum resources. The third section examines the Mexican side of the equation. Although Mexico’s energy sector was largely excluded from the North American Free Trade Agreement (NAFTA), the United States has traditionally relied on Mexico’s oil production to quell its energy security concerns. Given the inability of the Mexican government to fully modernize the country’s energy sector, the United States can no longer take Mexico for granted as an oil supplier. As sensible as it might be for Mexico to enlarge the coverage of NAFTA’s disciplines to its energy sector, a large swath of domestic public opinion continues to oppose the marketization of oil and gas production.1 The analysis is confined to the oil and gas sectors of the three countries. Although the three North American economies are rich in coal and uranium resources as well as in renewable energy (hydroelectric, wind, solar), hydrocarbons remain at the core of the U.S. security agenda and constitute the major energy resources exchanged at the regional level. 212 Isidro Morales 11-8201-8 ch11.qxd 7/13/07 4:34 PM Page 212 U.S. Energy Security Revisited: Looking North and South Energy cooperation in North America started when Canada and the United States joined the International Energy Agency (IEA) in 1974 in order to deal with soaring oil prices provoked by political instability in the Persian Gulf and the ability of the Organization of Petroleum Exporting Countries (OPEC) to fix...