Energy Resources: A Blessing or a Curse?

Abstract

The Debate Is having natural gas and oil (GO) a blessing or a curse? Mexico plays an important role as trading partner in energy with the U.S. and Canada. Mexico's energy potential is underutilized. The purpose of my research during the past four years has been to build an econometric model that links GO drilling with reserves and production, and use it to perform simulations in order to design public policy guidelines. The model is relatively simple and theoretically well-founded. Simulations were performed which support the hypothesis that GO are critical to the achievement of sustainable development. Policy errors explain the failure to provide investment in capacity required to meet the world's growing demand for GO. Mexico must either develop its GO domestic sources or increase imports. The Mexican Case serves as a useful counter to two recent theories that minimize the potential role of energy in sustainable development. The theory by Colin Campbell states that global GO supplies are near or past their peak, owed to the cumulative effects of resource exhaustion. The second, developed by Jeffrey Sachs ("The Resource Curse"), considers that GO offer no potential for useful contribution to sustainable development, but impede it by reducing the economic welfare of the host countries. The results of these four years of research efforts aim to influence the World Bank's decisions now under consideration for future funding to GO producing countries after 2008. The Econometric Analysis Mexico's energy resource potential is expected to be challenging. The recent stagnation of the Mexican energy sector is found to be attributable not to resource scarcity, but to insufficient government investment in new drilling activity. Achieving sustained growth in this environment will require significant cuts in government spending on other programs. The Mexican GO Supply Model enhances our understanding of the influence of energy in sustainable development(1). The model is relatively simple, theoretically wellfounded, and characterized by stable and robust parameters in line with comparable parameters estimated for other countries in the literature(2). This model provides the basis for the conclusions that it was lack of drilling effort, not resource scarcity, responsible for past reserve declines. This model brings hope and optimism for recovery based on recently expanded drilling budgets. PEMEX (Petroleos Mexicanos) is a company owned by the State; the only one that can produce GO by law. The simulations performed with the GO Supply Model reveal the potential for a recovery of supply based on a long-term cut in PEMEX's tax burden and the increase in private investment. The development and estimation of a detailed and integrated econometric GO Supply Model for Mexico is an effective tool for the design of public policy in Mexico. Moroney's model provides a description of three vertically integrated sectors: drilling, reserve additions, and production. "Modelling these three sectors individually is essential to understand GO supply, because ultimately, an increase in price can only lead to additional production through a process that begins with additional exploration and discovery, continues with an expansion of reserves, and finally results in additional production"(3).