The U.S. shale boom has done so much for America – so much, in fact, that its success is trickling down to its neighbors in Mexico.
U.S. natural gas is shaping up to be a very important competitive advantage for manufacturers to the south. U.S. natural gas exports to Mexico hit an all-time high last year, pushing down the country’s energy costs – and the industrial sector has been taking off ever since.
The cheap natural gas is being used to boost factory production, since Mexico is already competitive with places like China when it comes to labor costs. Now, with low energy costs and it close proximity to the U.S., Mexico is perfectly positioned to reap the rewards from the U.S. supply chain.
As U.S. natural gas production continues to soar, so too will manufacturing and industry in Mexico.
Mexico’s industrial output has dipped slightly this year, but experts believe the data is not a true indication of things to come – proximity and costs make it simply too convenient, and it is expected to start shooting back up this summer.
Mexico seems to be doing everything in its power to utilize its position with the U.S. The advantage will be extended with new pipelines to expand upon the growth in imports from the U.S. and to lock down its edge over the competition.
But it’s Mexico’s comparison to China that makes Mexico a cut above the rest, and this has a lot of U.S. boardrooms excited to open up for more business to the south. Chinese manufacturing labor costs went higher than Mexico’s last year as the rate of wages increased, and its energy costs are significantly higher, making it almost impossible for the Eastern nation to battle with Mexico for U.S. positioning.
It’s much cheaper for the U.S. to export natural gas to Mexico than to ship it to Asia through its LNG ports.
And with Mexico’s short supply, natural gas imports from the U.S. have been tremendous. Between 2003 and 2007, Mexico was importing between 350 and 400 billion cubic feet (Bcf) of natural gas, according to OilPrice.com, but since the U.S. gas boom began in 2008, gas prices went down, and imports jumped up 92 percent. In 2012 Mexico brought in 767 Bcf.
The only problem now is that imports from the U.S. are surging so much, the pipelines can no longer handle the load. This has forced Mexico to import more expensive liquefied natural gas.
The obvious solution: build more pipelines. There is a great economic incentive to do so, and it would ensure Mexico will continue its economic growth.
Mexico has lofty plans to more than double its import capacity from the U.S., according to Quartz. Starting with the Ramones pipeline, Mexico will build its largest energy infrastructure in 40 years. Phase one is set for completion sometime next year. The $3.3 billion pipeline will stretche 750-miles from Los Ramones, Mexico to Agua Dulce, California – near Texas shale oil fields.
At least six other new pipeline projects are also in the works, aimed at sending gas to Mexico.
The switch from oil to gas-fired power generation has been widely accepted in Mexico and continues to spread throughout the country.
Working closely is so much simpler for both the U.S. and Mexico. Since the U.S. is following the North American Free Trade Agreement, companies can avoid regulators and go directly to the source without the hassle of an unwanted trade agreement.
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Manufacturing in general has become so enticing to outside companies that many are making new investments in Mexico. Beyond the oil and gas industry, automakers like Honda (NYSE: HMC), Nissan (OTCMKTS: NSANY), and General Motors (NYSE: GM) are all making a push to send operations to Mexico.
It will be interesting to see how Mexico will handle its newfound growth and where its demand for U.S. natural gas will go. The nation may decide to quickly look at its own domestic reserves and start producing on its own.
That’s not likely to happen for some time, but Mexico is sitting on an estimated 115 billion barrels of oil equivalent, a number comparable to that of Kuwait.
It’s an afterthought though, really. Hydraulic fracturing capabilities haven’t advanced nearly as much as they need to, and infrastructure is also way behind.
It looks like as long as natural gas keeps doing what it’s doing in the U.S., Mexico will be eager to get its hands on it, especially as the country continues to grow.
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