The Growing US-Mexico Natural Gas Trade and Its Regional Economic Impacts in Mexico

Abstract

With the recent administration change in Mexico, the fluctuations in national energy policy have generated widespread concerns among investors and the public. The debate centers around Mexico's energy dependence on the US and how Mexico's energy development should move forward. The goal of this study is two-fold. We first review the history and background of the recent energy reforms in Mexico. The focus of the study is on quantifying the state-level regional economic impact of the growing US-Mexico natural gas trade in Mexico. We examine both the quantity effect (impact of import volume) and the price effect (impact of natural gas price changes). Our empirical analysis adopts a fixed-effects regression model and the instrumental variables (IV) estimation approach to address spatial heterogeneities and the potential endogeneity associated with natural gas import. The quantity effect analysis suggests a statistically significant positive employment impact of imports in non-mining sectors. The impact in the mining sector, however, is insignificant. The state-level average (non-mining) employment impact is 127 jobs per million MCFs of natural gas imported from the US. The price effect analysis suggests a statistically significant positive employment impact of price increases in the mining sector. A one-percentage increase in natural gas price (1.82 Pesos/GJ, in 2015 Peso) leads to an average state-level mining employment increase of 140 (or 2.38%). We also explored the implications of our findings for Mexico's energy policy, trade policy, and energy security.