Latin America’s new leftists are choosing oil despite renewables boom

Mexican president Andres Manuel Lopez Obrador visits state oil giant Pemex’s refinery in Veracruz.
Mexican president Andres Manuel Lopez Obrador visits state oil giant Pemex’s refinery in Veracruz.
Image: Press Office Andres Manuel Lopez Obrador/Handout via Reuters
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Argentina and Mexico’s new leftist presidents entered office with their countries’ renewables sectors taking on unprecedented levels of investment, following a series of successful clean energy auctions held by their center-right predecessors.

Both are now putting that momentum in jeopardy.

Just months after he took office in December 2018, Mexican president Andres Manuel Lobez Obrador, known as AMLO, canceled any further renewables auctions. He then tried to upend a government scheme to encourage green investment, and is aiming to cut subsidies given to renewables companies for using the grid. Meanwhile, he has funneled money into the state oil company.

Alberto Fernandez’s two-month-old Argentinian government is also already causing jitters in the clean energy sector. His administration’s rhetoric on energy has been focused on developing the oil sector, which could bring a rapid influx of foreign investment into Argentina’s teetering economy, said Lisa Viscidi, director of the energy program at the Inter-American Dialogue, a think tank focused on Latin America and the Caribbean. There are fears the government’s clean energy office will be swallowed by a bigger department, and potential plans to renegotiate Argentina’s debt could spell peril for an industry dependent on global finance.

Both countries, which have immense clean energy potential, are already on track to miss the renewable energy goals they committed to at the 2016 Paris Climate Summit.

AMLO’s oil love-in

There are three factors behind Lopez Obrador’s retrenchment on green energy, said Duncan Wood, director of the Mexico Institute at the Wilson Center: He has an ideological belief in state energy companies being key to Mexican development, an emotional attachment to fossil fuels stemming from a childhood in the oil-producing region of Tabasco, and “doesn’t really understand renewable energy.”

AMLO’s overriding economic goal is to undo what he argues were decades of “neoliberal” economic policy that led Mexico astray and return to the centralized, fossil-fuel driven system of the 1960s. Central to that goal is saving state oil company Pemex and the state electricity company, known by its acronym CFE—both of which are heavily indebted.

Climate change doesn’t seem to cross his mind, experts say.

“I don’t remember the president ever talking of climate change. It’s basically not on his or his team’s radar, and that’s very regrettable,” Polioptro Martinez-Austria, a professor at Universidad de las Americas Puebla, told Mexican newspaper El Universal last year. The indifference is jarring given Tabasco’s status as “one of the most spectacularly vulnerable Mexican states to climate change,” Wood said. Despite the storms and hurricanes that regularly lash Tabasco and its neighbors on the Atlantic coast, AMLO is building an $8 billion oil refinery there.

The renewables sector has become a casualty of his nationalist push to rejuvenate CFE and bring Mexico’s resources back under control of the state. In December, a court suspended an effort to give credits originally earmarked for new renewables projects to old state-owned plants. A few weeks later, CFE framed plans to cancel discounts given to renewables companies to use the grid as a move to reach even footing with private companies now enjoying state subsidies.

The plan doesn’t bode well for Mexico’s future energy stability, Viscidi said. Renewables auctions brought in private capital that Mexico really needed, with energy demands growing by about 3% per year and CFE struggling to cope with existent needs. “CFE hasn’t really been able to manage all the infrastructure itself,” she said. “CFE has huge debts—it really wasn’t able to take on the expenses of building [generation] capacities, and transmission lines are not being kept up.”

The issue is a hindrance to Mexico’s broader economy, Wood said. Before former president Enrique Peña Nieto’s reforms, the cost of Mexican energy was so high that it harmed Mexico’s attractiveness as a place for foreign businesses to invest. The massive enthusiasm for renewables had pushed prices down to “record levels,” he said, and slowing the sector down will likely push them back up.

Nonetheless, green businesses are optimistic about the medium term, Wood said. They hope price increases will keep their businesses viable, and expect that in 4 to 10 years, electricity shortages will force whoever is in power to turn to green energy. For the time being, Wood said, AMLO’s policies have pushed them to put plans for new projects on hold, but they’re continuing to invest in ones that are already underway.

Macri bets on shale

In Argentina, the early signs that president Fernandez will focus on oil development is less ideological and more about necessity, said Jeremy Martin, the vice-president for energy and sustainability at the Institute of the Americas think tank.

The country’s economy is in a dire state. A currency crisis in 2018 crippled then-president Mauricio Macri’s efforts at free market reforms, and forced the country to take a record $57 billion bailout from the IMF. As Fernandez now struggles to figure out how to avoid a sovereign default, Argentina badly needs capital investment. “They’re dealing with an economic crisis—they need dollars, employment, hard currency. Are renewables going to provide that? No,” Martin said. “What they need now, unfortunately, is commodities [investment].”

Fernandez has honed in on the enormous Vaca Muerta shale oil and gas reserve, and reportedly held meetings with oil executives to discuss legislation that would protect investors from capital controls while offering them tax benefits. The local indigenous community seems to be bearing the brunt of the development. Wells have exploded, drilling sites have leaked, and locals have complained of water pollution and related illness.

In the meantime, Fernandez’s decision to freeze electricity prices for six months has renewables investors worrying that he might meddle with the purchase power agreements that set prices and other metrics for new energy projects.

While it makes economic sense for Fernandez to pull in cash through fossil fuels, Viscidi argues there’s also an ideological element to the strategy. The main energy legacy of president Cristina Fernandez de Kirchner, who is now Fernandez’s vice president, is her 2012 expropriation of YPF, an oil company that had been privatized in the 1990s. In the meantime, under her rule “there really wasn’t a big emphasis on addressing climate change—was really no attempt to expand renewables in a significant way,” Viscidi said.

While the stance jars with the West’s typically environmentalist left, it is fairly typical of leftist leaders in Latin America, Viscidi says. “The position of most leftist leaders in Latin America has been to want to develop oil resources in particular and develop the oil wealth for the people,” she said. “There’s been a really big economic focus—that [oil] is important to fight poverty, and inequality, to have a sense of nationalism, and for state oil companies to take over.”

Unlike Lopez Obrador, Fernandez’s commitment to fossil fuels isn’t set in stone, but there’s little hope of continued expansion for a renewables sector that took in $4.8 billion under Macri. “It’s unlikely this government will hold more renewables auctions at least in the first half, or maybe for its first term—maybe if they win a second term there would be enough time,” Viscidi said.