The Economics of Natural Gas in Mexico - Revisited

Abstract

How long will Mexico continue to be a net importer of natural gas? We explore this question and raise the logical corollary—will import volumes increase? During 1992, gas imports by Mexico peaked at 300 to 350 MMcf/d, primarily to serve incremental demand in Mexico’s northern region. We begin our investigation by suggesting that natural gas demand in Mexico is a function of GDP and the real price of gas, the latter being tied to U.S. prices. Low U.S. gas prices have driven Mexico’s import strategies. If downward pressure on U.S. gas prices continues, the import market in Mexico could be preserved through the end of this century. Other factors contribute to the prospects of a long-run import strategy, in particular, capital investment constraints at Pemex; the need to substitute cleaner burning natural gas for the residual fuel oil used widely in Mexico; and a North American free trade zone which may encourage greater gas imports by Mexico. We conclude that it is reasonable for Mexico to remain a net importer of gas for at least the next 10 years.