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Falling energy prices in Mexico could be bad for Ontario

Ongoing efforts to drive down the costs of energy in Mexico may hurt the competitiveness of the industrial sector in southwestern Ontario, warns a U.S. energy policy expert.

'Fair to say Mexico's competitiveness is benefiting enormously in drop in electricity prices'

Ongoing efforts to drive down the costs of energy in Mexico may hurt the competitiveness of the industrial sector in southwestern Ontario, warns an energy policy expert.

Over the past two years, Mexico has brought forward legislative changes to allow greater private and foreign investment in its oil, gas and electricity sectors, said Duncan Wood, the director of the Mexico Institute in Washington, D.C.

Duncan Wood, the director of the Washington, D.C.-based Mexico Institute, says that efforts to reduce energy costs in Mexico will be another shot in the arm for that country's competitiveness. (wilsoncenter.org)

These changes are allowing new players to enter that market and reduce government control on the electricity sector.

"With the energy reform that is being passed and is being implemented right now, major electricity generators will now be able to produce and sell openly on the market in Mexico," Wood told CBC News in an interview. "There's going to much greater competition, hopefully there will be a higher level of efficiency in generation and distribution."

A second factor in this mix is the fact that new pipelines have been built to bring natural gas into Mexico from the United States.

"That is bringing in a much-needed source of cheaper fuel for generation purposes," said Wood.

In concert with this, Mexico is upgrading older plants to make use of natural gas and all newer plants will be built to use this same fuel.

"That's lowering the cost of the fuel source, therefore lowering the cost of generation and electricity in general," said Wood.

In recent years, Wood said the price of industrial electricity in Mexico has been very high when compared with the United States.

Mexico 'benefiting enormously' from changes

As this cost drops, Wood said it will be another shot in the arm for Mexico and its ability to compete.

"I think it's fair to say that Mexico's competitiveness is benefiting enormously in this drop in electricity prices, but it's only one of the factors that's out there," said Wood.

Like Canada, Mexico is located next to the United States, which is a key factor in its competitiveness.

The country has also seen infrastructure investments that allow a more efficient transfer of goods and materials than in the past.

But Wood said Mexico also has a "relatively skilled workforce that is still relatively cheap" and its various levels of government have gone to bat for business in order to draw in investment.

Wood said this combination of factors has helped make Mexico "an auto manufacturing powerhouse" and prompted the automakers to establish bigger footprints south of the U.S. border.

With Mexico now making moves to lower its electricity prices, this is yet another impediment for other manufacturing markets to compete alongside it.

"I think certainly it places much greater competitive pressure on Canada and on southwestern Ontario in particular," said Wood.

The major recession forced automakers to make some tough decisions and that involved a close evaluation of all of their costs, Wood said.

"They looked at labour contracts, they looked at salaries, etc., they looked at the overall price structure of their manufacturing model and that was a watershed moment, I would say, for the manufacturing industry in North America," he said.

In this new environment, Wood said "a country like Mexico looks incredibly attractive, [while] a country like Canada has to really fight...to maintain its competitiveness when it's trying to attract those big investments on the assembly side."

With files from the CBC's Nathan Swinn

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