Commentary: The recent winter storm that brought freezing temperatures to most of Texas not only caused deaths and a lot of human suffering, but it also revealed the vulnerability of cross-border trade to the power system. El Paso, Texas is on a different grid than the rest of the state and did not suffer the severe outages that struck most of Texas. However, even though they are not supplied by the Texas electricity grid, residents in northern Mexican states such as Chihuahua, Coahuila, and Nuevo Leon also suffered power outages and rolling blackouts. These anomalies cut off power to Mexican maquiladoras (production plants) and forced them to shut down.
A substantial portion of Mexican electricity generation plants use natural gas as a fuel. While Mexico is a major petroleum-producing country, much of the natural gas it generates contains excessive sulfur. In most cases, purer natural gas can be produced more efficiently and economically in the U.S. Of the total gas the U.S. exported to other countries in 2019, 66 percent went to Mexico. It is no surprise that Mexico imports a tremendous amount from its northern neighbor, Texas.
During the crisis, sectors and institutions fell like dominos in northern Mexico. First fell the supply of natural gas, due to it dependency on this commodity’s import from Texas. When Texas slipped into the crisis, its first response was to protect its citizens by stopping natural gas exports to Mexico to fire up its own plants. Next, the electricity plants could not operate due to diminishing natural gas supplies that were cut off from large users. The next domino to fall were the water systems, which are powered by electricity. Finally, entire supply chains were disrupted because production plants can’t operate without power in the midst of rolling blackouts. Mexico estimates that in the first couple of days of the crisis, billions of dollars were lost due to production being halted.
Some of my plant manager friends in the U.S. had to bring in containers via air freight to make up for supply chain disruptions, because they are dependent on their Mexican sister plants for products or production inputs. Shortages were further exacerbated by the back-up of ocean container vessels at the Ports of Los Angeles and Long Beach due to shortages of personnel brought on by the pandemic. Ultimately, the customer will end up absorbing the extra cost of air freight.
When plants in northern Mexico did have electricity, in many cases the water systems were without power or were temporarily inoperative. One of my friends who has a plant in Santa Teresa, New Mexico, and one in Juarez, Chihuahua, faced this issue. In order to maintain the workforce while the power was on, the company had to use swimming pool water to flush the toilets.
In other cases, less-than-load (LTL) carriers that move multiple loads from different customers in their semi-trailers could not operate due to the uncertainty of production schedules. Sometimes when maquiladoras had products ready to be shipped, they simply sat in the plant waiting for the logistics company, which itself was scrambling to address multi-customer needs.
After power was restored, many production plants were forced to make their employees work overtime in order to catch up with the demand from their customers that was not met due to the power outages. This requires a company to pay overtime wages in order to get back on schedule, adding another unforeseen cost to the supply chain.
INDEX, Mexico’s maquiladora association estimated that 2,600 production plants were shut down in northern Mexico, and up to 1.2 million employees had to be sent home during the crisis. Production losses were estimated at $200 million per hour. These outages, the closing of businesses without power, and the disruption to multiple supply chains does not put the border region in the best light when recruiting new industry. Reliable utilities are of critical importance when major manufacturers select a production site. Industry interests are rightfully calling on the Mexican federal government for an explanation.
If there were a time Mexico’s recently reformed energy sector could use national and foreign interests to invest in and protect the country’s electrical grid, it is now. Hopefully, Mexico's energy reform will allow it to better manage foreign natural gas supplies. Perhaps northern Mexico could redesign plants to use both natural gas and liquid fuels, thus giving it a backup when a crisis such as this strikes.
At minimum, we should learn from what went wrong and take steps to have Plan B in place next time, and the chances are good that there will be a next time. Scientists are predicting that due to global warming’s effect on our atmosphere, erratic weather will become more common in the future. And this is not solely a Mexican problem. Cross-border trade and manufacturing have been staples of the U.S.-Mexico border for more than 50 years. The U.S. and Mexico have succeeded in competing in the global market by integrating their economies. What affects one partner during a crisis also affects the other as has been made apparent again.