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LA Times reports output at Mexico's most important oil field has fallen steeply this year, raising fears that wells there that generate 60% of the country's petroleum are in the throes of a major decline. Mexico is the world's No. 5 oil producer. Not only would this be bad news for Mexico but also for the U.S., for which Mexico is the No. 2 petroleum supplier, behind Canada. And this all could exacerbate tight global supplies that have kept oil at record prices.

The five oil behemoths: BP (NYSE:BP), ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), ExxonMobil (NYSE:XOM) and Royal Dutch Shell (RDSA) are expected to report combined profits of more than $30 billion which is a 32% bounty over last year and it is being fueled by worldwide economic growth and political instability that helped keep oil above $70 a barrel. The oil industry is braced for a backlash in Washington, where elected officials are concerned about constituents in many parts of the country paying more than $3 a gallon at the pump. But expect less criticism than usual given the attention focused on Middle East violence.

Whatever the political fallout, the industry has done right by Wall Street's standards. Refining crude oil into gasoline, diesel and heating oil turned out to be a blockbuster business this spring with the average profit from refining was $19.10 per barrel of crude, 60% higher than a year ago. Independent refiners such as Valero (NYSE:VLO) and Tesoro (NYSE:TSO) are the greatest beneficiaries of this trend. Looking beyond summer oil prices should tail off toward the end of 2006 as economic growth continues to slow.

Nationwide gas prices rose nearly two cents over the past two weeks, to a record high of $3.02 per gallon of self-serve regular. The good news is that given that demand in recent days has been flat or shrinking, prices are unlikely to continue upward. The trend in gas prices typically follows that of crude, and crude prices for slipped from more than $77 per barrel on July 14 to $74.43 last week. Keep in mind that today’s gas prices after being adjusted for inflation remain 15 cents lower than what it was in March 1981.

Source: Rob Black's Energy Stock Report