The North American energy scene keeps getting more interesting

So yesterday Mexican president Enrique Peña Nieto made some news, according to the Washington Post's Stephanie McCrummen:

Mexican President Enrique Peña Nieto proposed historic changes to this nation’s state-run energy sector Monday, cracking open the door for global oil giants such as Exxon Mobil and Shell to invest in Mexico’s lethargic 75-year-old state oil monopoly, Pemex, the eighth-largest oil company in the world and a symbol of deep nationalist pride.

So, this seems like a pretty big deal, as the Financial Times' John Paul Rathbone and Eduardo Garcia note:   

Mexico sits on reserves estimated at 115bn barrels of oil equivalent, comparable to Kuwait’s. Just over half its reserves are non-conventionals, including shale gas, and Pemex estimates that with the right investment and technology about 27bn barrels of deep sea crude could be added to the nation’s proven reserves.

All stages of Mexico’s energy chain – from production and refining to distribution – have remained the legal property of the Mexican people since 1938, when President Lázaro Cárdenas expropriated fields from US and British companies and changed the nation’s constitution.

Although the expropriation is a point of nationalist pride celebrated every March 18, the burden that Pemex faces of being the government’s cash cow – providing a third of government revenues – has led to years of under-investment. Pemex, with $100bn of revenues, is the world’s seventh-largest oil producer, but output has fallen by a quarter to under 2.6m barrels of oil a day over the past 10 years.

Mr Peña Nieto said the reform would reverse that decline, and “provide cheaper energy for all Mexicans”. He said the changes would allow Mexico to boost oil production to 3m bpd by 2018 and to 3.5m bpd by 2025. Gas production would also increase from 5.8bn cubic feet currently, to 8bn cubic feet by 2018 and 10.4bn cubic feet by 2025.

Both stories indicate that between his PRI party and the National Action Party (PAN), Peña Nieto  has the votes to get this through the Mexican legislature.  So, again, a pretty big deal... but back to McCrummen for some of the details:

[Peña Nieto] proposed constitutional changes that would allow for risk- and profit-sharing partnerships between foreign firms and Pemex, a move aimed at luring the money and technology necessary to exploit Mexico’s immense but hard-to-reach deep-water and shale oil fields. At the same time, Peña Nieto emphasized that Pemex would remain the sole owner and manager of Mexico’s oil.

And back to the FT story for why U.S. oil firms might not be all too keen on these proposed arrangements:

“It’s a pretty solid proposal,” said Duncan Wood, director of the Wilson Centre’s Mexico Institute in Washington DC. “But it will be interesting to see how oil companies take to profit-sharing rather than production-sharing contracts as that may limit their ability to book reserves.” Generally, under US Securities and Exchange Regulation, a company must have a right to produced reserves in order to book them.

My hunch is that, compared to some of the other places oil companies have chosen to invest, Mexico might look comparatively good.  Assuming the proposed reforms don't lead to mass mobilization against the constitutional changes, some MNCs are gonna be very interested.  Which makes this simply one more data point that suggests interesting things are afoot in the North American energy scene. 

Daniel W. Drezner

Introducing... the Cassandra Scale!! [UPDATED]

Glenn Hubbard and Tim Kane have an op-ed in today's New York Times about the dangers of mounting levels of U.S. government debt and Why Something Must Be Done About It.  This appears to be a spin-off from their book, Balance:  The Economics of Great Powers from Ancient Rome to Modern America

Now your humble blogger has heard variants of this argument again and again and again and again and again and again and again over the past few years.  Let's call the category of authors who promote this argument "debtists."  In fact, I've heard it so many times that I have now developed the proprietary ten-point Cassandra Scale to measure the extent to which each individual author hits the erogenous zones of austerity advocates and chattering classes.  Let's see how Hubbard and Kane do!! 

1)  Reference a recent government debt crisis, no matter how invalid the comparison.  Is there a small foreign country that is currently facing exploding debt levels?  A local government that has just declared bankruptcy?  Debtists should warn that the United States is in danger of turning into the next Dubai/Iceland/Greece/Illinois.  Do these cases compare with the U.S. federal government?  Of course not!  But all you need to do is have the reader think that they are comparable cases. 

How do Hubbard and Kane do?  No small country references, but we do get this in the opening paragraph:  "Federal, state and city governments in the United States have lost their fiscal grip, and the saga of Detroit’s bankruptcy is just one example." Note:  state and city governments get dropped from the discussion immediately afterwards, for reasons that will go unmentioned.  One point!

2)  Soberly invoke warnings about national security/foreign indebtedness.  The key to this argument is to not just make it about economics, but national security as well.  It doesn't matter if this argument is total horses**t --  debtists should invoke the amount the United States owes China or some high-ranking member of the foreign policy community to show that this isn't just about dollars and cents, but the American way of life. 

How do Hubbard and Kane do?  They check this box off with the very first sentence:  "Two years ago, Adm. Mike Mullen, at the time the chairman of the Joint Chiefs of Staff, said that debt was the “single biggest threat to our national security” — not some rogue nation, or terrorist group, but debt." Another point!

3)  Invoking the precautionary principle on debt dynamics.  On of the tricky empirical issues with warning about exploding levels of U.S. debt is that all the bad stuff hasn't happened. Interest rates haven't spiked, inflation hasn't reared its ugly head, and even deficit-to-GDP ratios have shrunk rather rapidly over the past few years.  How should debtists combat this?  Warn that things could change at any moment unless we act now.  Guarding against the debtopocalypse is like guarding against an EMP.  Since both are apparently far more likely than a sharknado, clearly Something Must Be Done.  Also, it's an impossible argument to falsify.

How do Hubbard and Kane do?   Well, there is this sentence: "What makes the threat of exploding debt especially dangerous is that it’s not like a faucet that can be easily turned down."  To be honest, however, this isn't that out there of a statement.  No Cassandra point awarded.

4)  Reference the fall of past empires.  It's always good to compare the United States to ancient Rome, Imperial Spain, or Victorian-era Great Britain as examples of past empires that have collapsed due to debt issues. 

How do Hubbard and Kane do?  I'm astonished to say that even though this appears to be one of the central themes of their book, it's nowhere to be seen in this op-ed.  No point. 

5)  Relying on long-term debt projections as gospel.  Those of us who are old enough to remember long-term budget projections from the early 1990s and early 2000s tend to discount current projections into the future the longer out they go.  Debtists, however, should throw caution into the wind and assert that these long-term projections are fact, even if certain background assumptions are in danger of breaking down.

How do Hubbard and Kane do?  Pretty well!  "The C.B.O. still anticipates a 2015 deficit of $378 billion. And Uncle Sam is heading — and this is the best-case scenario — toward nearly a trillion dollars of red ink every year after 2023. In an effort to alert Congress to the danger, the C.B.O. also publishes a more realistic alternative fiscal scenario that anticipates how much will actually be spent by the Treasury in the coming decade. The realistic scenario predicts $1.76 trillion more in debt than the old baseline."  A full point!

6)  Fun with numbers.  Your average reader is not going to look at a gross debt number and think, "well, wait a minute, what does that mean on a per annum basis?" or "as a percentage of GDP, is that all that bad?" or "are these actual outlays or just theoretical commitments?"  Debtists should just use the gross numbers, and the higher the number, the better

How do Hubbard and Kane do?  Meh.  If you look at the quote above, they talk about the $1.76 trillion debt increase but don't bother saying that it's over ten years or what it means as a percentage of GDP.  I'm not awarding them a point.   

7)  Fail to mention private sector deleveraging.  If the government is assuming higher debt loads in order to allow households and private firms to deleverage, that's a good use of budget deficits.  But don't say that! 

How do Hubbard and Kane do?  No mention of U.S. private-sector deleveraging. A full point! 

8)  Compare the government to.... something that is not a government.  Sure, the U.S. government can print currency if necessary and has a much longer time horizon than households and is not like a private-sector firm in many, many ways.  But debtists should use this analogy because it's political gold.  Comparing the U.S. government to a bankrupt family or firm invokes all the moral opprobrium without any blowback!

How do Hubbard and Kane do?  Bingo.  "The federal government continues to analyze Social Security and Medicare through the lens of cash accounting: counting up the costs of new long-term obligations not in the year the obligation is made, but off in the distant future when they must be paid. Private firms must accumulate funds to meet their pension obligations, why not Uncle Sam?"  A full point!

9)  Heterodoxy to signal that you're not insane.  The smart debtist needs to acknowledge that some of their allies might be making some crazy-ass arguments that undermine their overall argument.  Rhetorically distancing one's self from these people is a smart move. 

How do Hubbard and Kane do?  Very well, as they devote a considerable amount of their op-ed to discredit the "starve-the-beast" argument in favor of tax cuts. A full point!   

10)  Propose crazy-ass plan to solve the problem. Whether it's cutting the budget deficit by approximately "$250 billion a year over the next four to five years," or something even more radical, debtists can't just complain about the problem, they must propose a solution.  And the more radical the better!  The more "out there" the solution, the more like it seems like the debt problem must be really, really serious. 

How do Hubbard and Kane do?  They close their op-ed with a passionate argument in favor of, "a 28th Amendment to the Constitution requiring a balanced budget."  If I could award them two points, I would. 

So, tallying up the figures, Hubbard and Kane's op-ed gets a seven on the Cassandra Scale.  Very respectable.  Not Niall Ferguson-level hysteria.... but respectable.   

Readers are encouraged to apply the Cassandra scale to past and future debtist arguments to see how well they score.  It's easy and fun! 

UPDATE:  As many have pointed out, it would appear that Cassandra was the wrong name for this scale.  I was looking for a symbolic name of someone who calls out false warnings when there is no emergency, and it would appear picked a name symbolic of the exact opposite of what I intended.  I blame myself -- I should have taken Mythology instead of that Shakespeare course in college. 

Sooo.... readers are warmly encouraged to come up with a better name for this scale.