In politics, as in life, expectations can be destiny. Set them too low and nothing gets done. Too high and even good outcomes can trigger disappointment and endless whining.

Miscalculated expectations might explain why some observers are pooh-poohing Mexican President Enrique Peña Nieto's proposal last week to reform his country's energy sector.

He did not offer the full-blown privatization of the state-owned oil monopoly, Pemex. Nor did he propose removing the constitution's prohibition against granting concessions for exploration and exploitation by international oil companies. Yet neither shortfall is fatal (more on that below).

Those who were naive enough to expect that Mr. Peña Nieto would try to heave overboard what is practically a religious icon for his Institutional Revolutionary Party (PRI) deserve their dashed hopes. Ever since the center-right National Action Party (PAN) won the presidency in 2000, upending the PRI's 70-year rule, the executive no longer rules like a dictator in Mexico. Mr. Peña Nieto had PAN support for a more market-minded energy reform, but with five years left in his six-year term he cannot afford to alienate his left flank.

Yet even in the compromises that this political reality forced him to make, the energy reform he proposed has significant possibilities for wealth creation.

If there is a reason to be wary it is not that the reform won't produce more revenue. Rather, it is what the president plans to do with it. Mr. Peña Nieto's pacto, which is an agreement between the major parties to work on reform, includes welfare-state projects like universal health care and pensions and unemployment insurance. Depressingly, his government talks about tax increases in a country that needs to lower the burden of the state to become more competitive globally and to grow its way out of poverty.

In February 2010, I spent a day with Pemex personnel, hopping by helicopter around the company's oil platforms in the Gulf of Mexico. I was impressed by the quality of the people and equipment, which was almost entirely imported. Even so, the company's oil production fell 25% in the last decade. Last month Pemex reported that the volume of crude exports in the first half of the year dropped by 4.7% owing to falling output and growing domestic demand.

Mexico could face a fiscal crisis if oil production continues to decline, because Pemex revenues account for a third of the government's budget. Moreover, in April 2012 Standard & Poor's estimated the company's unfunded pension liabilities and other obligations at some $60.6 billion.

On a visit to The Wall Street Journal in November 2011, presidential candidate Peña Nieto complained to me about Mexico's slow growth. To tackle the problem, he promised a constitutional amendment to allow private investment in Pemex. On Monday he made a down payment on that pledge. In September he will send the proposed reform to Congress.

To understand why this proposal has promise, it is necessary to look at Mexico's constitutional barriers to private investment. The government wants to reform Article 27 to eliminate the prohibition on the government "using contracts in its hydrocarbon exploitation activities." In Article 28, Mr. Peña Nieto proposes that hydrocarbons, petrochemicals, electric power and refining be removed from the list of "strategic" sectors which are considered exclusively the domain of the state.

These reforms will open the door to government contracts with private companies for exploration, exploitation and the sale of gasoline in Mexico. The reform will give the government the power to choose the oil fields that it wants to develop and to call for bids. Pemex will compete with all comers. The Pemex monopoly will be a thing of the past.

Critics charge that the "profit-sharing contracts" that Mr. Peña Nieto is proposing are, from the perspective of a private oil company, inferior to the production-sharing contracts offered elsewhere because they increase the investor's risk. Yet the attractiveness of those contracts will depend on what is known in Mexico as "the secondary legislation."

The government's incentive—once Mr. Peña Nieto has spent significant political capital getting the constitution amended—will be to craft a law with the help of his PAN allies that provides for the highest return possible on the state's oil wealth now under the ground. That will require terms that are attractive enough to bring in investors. It is unlikely that the failure of former president Felipe Calderón's limited energy reform in 2008 will be lost on the architects of the new law.

Plenty of poor countries allow international oil companies to bring up the black gold. But in order to become an engine of prosperity, that wealth must help stimulate private enterprise and not be taxed away. If the Peña Nieto government doesn't understand this, it may succeed at energy reform but fail to make Mexicans better off.