Reduced Oil Production Hurting Mexican Economy

Much lower oil prices seem to have concentrated the minds of Mexican leaders on their country’s fast approaching fiscal crisis. As I’ve written many times, roughly 40% the Mexican federal budget is financed by oil exports from the state-owned PEMEX oil company. But production is falling rapidly, has been doing so for a couple of years, and promises to continue falling even faster after 2010. Mexico was clever enough to hedge its oil at $70 a barrel through 2009, but leaders are quickly calculating how large the 2010 budget deficits will be if oil production continues to decline and oil prices do not rise substantially after 2009.

Two recent reports (here and here) say that the country is taking heroic measures to increase production at their Chicontepec field in order to make up for continuing large declines at Cantarell, its giant field that produces the bulk of Mexican oil. Mexican crude production is reported down 9.6% in October and exports were down even more steeply, declining 17.6%.

Perhaps of most concern is the Financial Times story about the new Mexican oil law that was supposed to enable PEMEX to develop new fields in the GOM despite Mexico’s constitutional prohibition against foreign interests taking an equity interest in Mexican oil. This report says the incentives for foreign company to assist Mexico in finding oil allowed by the recently passed legislation are nowhere near as powerful as are needed to get the job done.

If true, as I suspect these reports are, Mexico could face a fiscal crisis within just a few years. I’ve been negative on Mexico for some time. I wish I knew a good way to play the fall of the Mexican economy. Suggestions are most welcome.

Comments

[tom007]

Nice article.

I have been under the assumption that the peso/USD relationship is largely based on the Oil Price i.e. if the price of oil is high, Mexico is flooded with USD and the Mexican need for USD is diminished - and the prices in Mexico for USD holders are high.

I know that for several years Mexico has not been any bargain for USD holders. And oil has been high.

Jim, can you shed any light on this relationship?

2008 Dec 15 12:25 PM

[dieuwer]

Perhaps a good 'play' would be to short EWW?

2008 Dec 15 12:59 PM

[longoil]

As the Mexican economy falls with falling oil production, the increased employment in Mexico will trigger greater illegal immigration into the United States and consequently raise the policing effort needed by the US Border Patrol.

If I were investing in such a scenario, I would look at companies that produce security technology that would help US Homeland Security do a more effective job with less people. Examples: Drone planes, intruder detection technology, etc.

2008 Dec 15 02:36 PM

[cjwirth]

Good article Jim,

The collapse in Mexico will come a little slower than some think. The Mexican economic collapse will mean massive unemployment, reduced factory orders, and a halt to construction. Most oil in Mexico is used for auto/truck transport and construction. Much of this oil not used in Mexico will be sold to the U.S.; therefore, the Mexican government will be able to sell oil for a bit longer, but not much. The situation is grim.

But the situation in the U.S. is not much better.

Independent studies (reviewed in the Peak Oil Report

www.peakoilassociates....

by Clifford J. Wirth) conclude that Peak Oil production will occur (or has occurred) between 2005 to 2010 (projected year for peak in parentheses), as follows:

* Association for the Study of Peak Oil (2007)

* Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (2008 to 2010)

* Tony Eriksen, Oil stock analyst (2008)

* Matthew Simmons, Energy investment banker, (2007)

* T. Boone Pickens, Oil and gas investor (2007)

* U.S. Army Corps of Engineers (2005)

* Kenneth S. Deffeyes, Princeton professor and retired shell Geologist (2005)

* Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)

* Chris Skrebowski, Editor of “Petroleum Review” (2010)

* Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)

* Energy Watch Group in Germany (2006)


Independent studies conclude that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

www.energywatchgroup.o...

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: www.peakoilassociates....

I used to live in NH-USA, but moved to a sustainable place in Mexico. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207. survivingpeakoil.blogs.../

2008 Dec 15 05:37 PM

[cjwirth]

Good article Jim,

The collapse in Mexico will come a little slower than some think. The Mexican economic collapse will mean massive unemployment, reduced factory orders, and a halt to construction. Most oil in Mexico is used for auto/truck transport and construction. Much of this oil not used in Mexico will be sold to the U.S.; therefore, the Mexican government will be able to sell oil for a bit longer, but not much. The situation is grim.

But the situation in the U.S. is not much better.

Independent studies (reviewed in the Peak Oil Report

www.peakoilassociates....

by Clifford J. Wirth) conclude that Peak Oil production will occur (or has occurred) between 2005 to 2010 (projected year for peak in parentheses), as follows:

* Association for the Study of Peak Oil (2007)

* Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (2008 to 2010)

* Tony Eriksen, Oil stock analyst (2008)

* Matthew Simmons, Energy investment banker, (2007)

* T. Boone Pickens, Oil and gas investor (2007)

* U.S. Army Corps of Engineers (2005)

* Kenneth S. Deffeyes, Princeton professor and retired shell Geologist (2005)

* Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)

* Chris Skrebowski, Editor of “Petroleum Review” (2010)

* Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)

* Energy Watch Group in Germany (2006)


Independent studies conclude that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

www.energywatchgroup.o...

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: www.peakoilassociates....

I used to live in NH-USA, but moved to a sustainable place in Mexico. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207. survivingpeakoil.blogs.../

2008 Dec 15 05:58 PM

[Paul Killinger]

Dr. Wirth,

Interesting and well researched comments. Thank you.

However, it is possible that peak oil may not matter as much as many think it might. We've already seen what relatively minor demand destruction has done to oil prices, and this trend is likely to intensify as time goes by.

Electricity pricing is a different issue. It appears increasingly likely that our government is going to artificially constrain supply, thereby driving up rates sharply. However, I foresee significant consumer blowback to this effort, so the outcome will be interesting to observe.

I, too, am looking to relocate to a more sustainable clime. As I suspect you have taken the time to research this issue, may I ask where you've settled in Mexico? I've been looking somewhat farther south, and Montevideo, Uruguay has come to mind.

2008 Dec 16 10:03 AM

[NOWHEREMAN]

Mexico is almost fully hedged for 2009 at $70. Or so I have heard. Unless Oil moves above that level, Mexico will be a non-event in 2009.

IMHO

2008 Dec 16 10:16 AM

[website]

With This economics and global oil supply increasing and declining demand declining Mexico could face a fiscal crisis in 2009.
That Could be rick for Mexico ,Venezuela Russia etc
I,m not talking about log time, Just 2009

2009 Jan 01 04:22 PM