Should Mexico Stop Exporting Oil?

In May, oil production from Mexico’s (previously) largest oil field Cantarell slipped below 700 kb/day. While the death of Cantarell has been much discussed since it peaked five years ago at 2.1 Mb/day, what’s less recognized is that the toppling of Cantarell has absolutely shattered Mexico’s effort to halt the decline of oil exports.

The problem is simple. With Mexican domestic consumption of oil rising or flat, and overall production in serious decline, exports have fallen even more dramatically. And given that Mexico will one day not be able to export oil at all, one wonders they should take preemptive action, and phase out oil exports now.

Mexico’s revenues from oil sales are already crashing. While it’s well known that Mexico hedged forward oil sales in 2008 (and did rather well on that trade as oil prices fell), it might behoove Mexico to start dealing sooner, rather than later, with the inevitable trajectory to zero. Oil export revenue has now fallen by over 50% since last year. Mexico will indeed stop exporting oil, probably no later than 2012. Frankly, I see headlines about the situation coming as soon as 2011.

Mexico is only producing 2.65 Mb/day now of crude oil. With domestic consumption running at roughly 2/3 of that figure, exports of crude oil are of course now below 1 Mb/day. The chart I’ve enclosed here includes exports of both oil and natural gas liquids, which keeps the “liquids” export figure still above 1 Mb/day. Well, that too will fall. Given the strategic importance of Mexican supply (Mexican oil travels quickly to the US) one wonders why this is not a front page story already. The implications for Mexican political stability are also fully in play.

How has Mexico handled the revenue shortfalls? Like most other countries in the world, they are borrowing money. The math is rather unforgiving. In the case of the United States, where we manufacture debt and dollars, we have had to replace the loss of paper production with…more paper production. Now that Mexico is using paper to replace its lost oil production, I am less convinced the world will grant De Effe (D.F. for Distrito Federal, or simply: Mexico City) the same leniency granted so far to Washington.

Were Mexico to stop exporting oil now, I see several advantages. One, the government could make a staged exit of their own choosing, thus stripping out the volatility in oil export revenues, which are going to end anyway. This would encourage planning. Two, the country could start facing up sooner to the need to make products with their remaining oil surplus, rather than selling the precious resource as a cheap, undervalued raw good. And finally, the announcement would send a wake-up call to the world oil market’s, and would likely effect the crude oil futures curve, thus pulling up current prices a bit higher. Why leave the oil export market as the UK and Indonesia did, in rather sad resignation? Better for Mexico to make its exit with a bang.

Graphic: Net exports of crude oil and natural gas liquids from Mexico, 1980-2008.

Comments

[ScottEX:]

I don't see how anybody benefits from Mexico shooting itself in the foot. In fact, the country has the world's 3rd largest proven reserves with over 12billion barrels. The Mexican constitution however prevents foreign companies from investing in its natural resources. Without the technology or FDI their massive resource will stay in the ground.

Mexico out with a bang, I doubt it, how about Mexico got the US by the blls...

Jun 24 08:37 AM

[Shale Gas:]

The decline in Mexican Crude oil production is not inevitable. All they need to do is start spending more money to explore and they will see an increase in production. And what are they supposed to do with the one million barrels per day that they export now under your plan? Just store it?

Jun 24 08:48 AM

[john s. gordon:]

they can't stop, they need the revenue - now.
> jack

Jun 24 08:52 AM

[Ferdinand E...:]

I go along with your argument, Gregor. I had a discussion with a gentleman from Norway a few years ago who made similar points - about his country. It would have made economic sense to reduce production, although it was true that Norway didn't need to worry about money for at least fifty years.

Jun 24 10:07 AM

[Mark Anthony:]

Rationally, Mexico should immediately cut its oil export and try to leave more for its future consumption. But in reality, all politicians are short-sighted. Not only they can not halt export, they are trying their best to squeeze the oil out as fast as they can, export as much as they can, to generate current revenue and take care of current crisis. The collapse of Cantarell production happens amid desperate efforts to try to squeeze itasmuch as possible, as fast as possible.

Peak Oil is upon us, folks. Learn what is Peak Oil and why it matters to every one. Humanity's only realistic solution to Peak Oil is Cold Fusion. Read here and follow the link to CBS 60 Minutes program on April 19 on Cold Fusion:

seekingalpha.com/artic...

Jun 24 11:10 AM

[Ron P.:]

ScottEX says Mexico has the world's 3rd largest proven reserves with over 12billion barrels. If this is the case then the world is in deep trouble indeed. Obviously this is wrong. Mexico is 17 in proven reserves, or was as of 2005. They are probably below that today.

At any rate Mexico's exports are declining rapidly. Their exports will reach zero in about 5 years regardless.

Jun 24 11:30 AM

[blu:]

Well I don't know beans about cold fusion, but I do know it doesn't matter what Mexico does....
They can cut and save... they can pump and sell.. or they can "drill baby, drill. It is a decision for them domestically. As far as world oil supply goes, it is part of what the markets are seeing as rapidly decreasing supply and forthcoming increases in demand.
Peak oil has come and gone.... its effects have only begun.

Jun 24 12:20 PM

[Alex Filonov:]

Nationalization kills business. Nationalization of Mexian oil is killing Mexican oil business. They have a lot of potential fields, including those in the Gulf, but national oil company doesn't have money for prospecting, and law doesn't allow private business in.

Jun 24 12:37 PM

[Pax Americana:]

Oil is expected to run out in "35 years" , using the highest reserve
calculations excluding additional demand[ hat tip to oiltrader] .
This last sentence I still consider "Shocking" as "Peak- Oil "is only
a few decades away. Mexico has other major problems to
engage seriously with how about a Semi- Autonomous-Narco
State for example with fast depleting oil and narrowing Tax Reveneus.

Jun 24 01:22 PM

[Mark Anthony:]

Pax:

We run into a severe global energy crisis at Peak Oil point, NOT when oil runs out. Peak Oil is the point when the world's oil resource is half gone, that's the point where annual production reaches an all time peak. After that, it is ever declining annual production, and decline at a rapid pace, regardless of all the effort to try to boost production. You need to get knowledgeable about Peak Oil.

My opinion is Cold Fusion is the only thing that can save humanity from a very dark energy future. Read here:
stockology.blogspot.co...

According to may experts, Peak Oil has already occured in 2005.

Jun 24 02:59 PM

[Energy Trader:]

Cold Fusion? Really. Is there anyway to block comments from Mark Anthony so we don't have to see them? I'm sure others have to be asking the same question.

Or Mexico could follow Brazil where they had a national oil company in Petrobras performing just as poorly as Pemex is currently, privatize the oil company and open it upto the public. Once that happens I would imagine numerous 100 MM bbl fields being discovered. The more we look for oil the more we find. It happened in Brazil, it can happen in Mexico.

My guess as to what will happen: As usual with any government tough decisions will not be made until they absolutely have to. At that point the people of Mexico will come together and find away to get the oil out of the ground in an effecient manner.

Jun 24 03:25 PM

[Pax Americana:]

Thanks Mark, on the "Peak Oil Scenario" have taken what you
said on board.

Jun 24 03:39 PM

[LKofScotland:]

hmm. oil or corn, corn or oil. methinks they'll choose corn and keep exporting their oil.

Jun 24 04:59 PM

[a. palmer jr.:]

I can't see where exporting all that oil has done them any good. They had better save it for further use, otherwise they'll have to come begging to the US for yet another favor. They need to concentrate right now on obtaining some kind of justice system that works and to prosecute all the drug pushers and criminals.

Jun 24 08:41 PM

[ScottEX:]

Sorry, you are right, I don't know where I got that number, still, 12 million barrels is a lot...


On Jun 24 11:30 AM Ron P. wrote:

> ScottEX says Mexico has the world's 3rd largest proven reserves with
> over 12billion barrels. If this is the case then the world is in
> deep trouble indeed. Obviously this is wrong. Mexico is 17 in proven
> reserves, or was as of 2005. They are probably below that today.
>
>
> At any rate Mexico's exports are declining rapidly. Their exports
> will reach zero in about 5 years regardless.

Jun 25 02:47 PM

[ScottEX:]

But hey, they are incredible innovators, perhaps they will bring us Cold Fusion SUVs


On Jun 24 11:30 AM Ron P. wrote:

> ScottEX says Mexico has the world's 3rd largest proven reserves with
> over 12billion barrels. If this is the case then the world is in
> deep trouble indeed. Obviously this is wrong. Mexico is 17 in proven
> reserves, or was as of 2005. They are probably below that today.
>
>
> At any rate Mexico's exports are declining rapidly. Their exports
> will reach zero in about 5 years regardless.

Jun 25 02:49 PM