Oil In Mexico — A Nation In A State?
A Fleet Street Letter Special Report
By Michael Orme
Mexico as a nation-state is under threat, and with it the US’s third largest source of oil. Indeed, by some definitions, Mexico is no longer a functioning nation-state.
The Federal government does not have the forces to smoke out, let alone counter the drug barons who virtually control such provinces as Sinaloa, Nuevo Leon and Sonora. Nor can they tackle the rebels and privateers who have been disrupting the country’s oil infrastructure. There has been a mass exodus from the police and the army in the wake of the assassinations of hundreds of public officials.
Moreover, Mexico as a state lacks diverse and predictable sources of tax revenues. It is reckoned that over 70% of Mexican businesses and individuals cheat the system, leaving the government to rely heavily on the State-owned oil company, PEMEX to act as a de facto tax collector. These PEMEX activities account for 40% of government revenues.
And therein lies an increasingly serious problem.
Oil in Mexico: The end of the oil
The vast Cantarell oilfield, the world’s second largest, is running dry. In the last two years daily output has halved to just over one million barrels a day. Worse, this figure is forecast to decline by a further 80% by 2020.
Over the next dozen years or so Mexico’s overall oil output is projected to fall by at least 30%. In this period, Mexican domestic demand is likely to increase by at least 10%.
The disparity is alarming. The only saviour could be a miraculous production increase in the Chincopec and Ku- Maloob-Zaap fields.
This summer, in a little noted release, PEMEX said it would be ‘out of oil’ in seven years — not short of oil but ‘out of it’, So who or what will then provide a weak and fractured government with its main source of revenues?
As if the accelerating depletion of Mexican oil wasn’t serious enough, it is the ‘above-ground’ factors that are worrying Washington more and more.
This year has seen a string of rebel attacks on oil infrastructure, including the Queretaro pipeline.
These attacks led to shutdowns at ‘just-in-time’ production facilities owned by major multinationals such as Honda, Kellogg’s, Hershey’s and Nissan. The effects of these shutdowns rippled through logistics chains with significant economic impact.
The fear is that the rebels’ own evaluations of their success in targeting oil infrastructure will encourage them to launch further attacks on the system.
It has been well noted by Mexico’s political rebels and criminal class how successful the Movement for the Emancipation of the Nigerian Delta (MEND) in Nigeria has been. The guerillas have been disrupting Nigerian oil supplies, and privateers have been extorting cash by kidnapping key people, especially foreigners, from the oilfields.
Oil in Mexico: A country in turmoil
Mexico, which sports half of Latin America’s billionaires, including cell phone tycoon Carlos Slim, now the world’s richest man, is now an incendiary mix of wealth, black markets, criminals, emigrants, and oil and gas reserves, over which a Federal government is singly failing to preside.
It is said that the country has two main ‘safety valves’— oil and emigration.
The oil ‘valve’ seems less ‘safe’ by the day as both below and above-ground factors turn sour.
The gap between rich and poor in the country — now compounded by the recent ‘tortilla turmoil’, resulting from the impact of the US corn-based ethanol policy on grain prices — is only set to widen.
The Federal government failed to handle the matter competently, and there were widespread riots. Adding to the problem, the government is so short of funds that it is unable to provide the social welfare needed to stave off serious civil unrest. This further fuels the rebel cause and gives more power to the drug barons.
The inevitable result? The government opens the other ‘safety valve’ — yet more emigration north of the border.
Oil in Mexico: Exodus of the labour force
There are already at least 20 million Mexicans in the US. Émigrés are already causing major demographic and power shifts in the southern part of the US. It was well noted that California recently vetoed a US Federal Government move to double National Guard patrols at the border.
But more Mexicans in the US means more remittances to Mexico. Remittances are estimated at more than $20bn a year, and there have been attempts by the Mexican government to use them to ease its fiscal problems. In particular towns and villages, they are offering to match remittances with public funds to provide essential public works. So far these initiatives have not cut it. Before long, remittances will overtake oil as Mexico’s principal revenue source.
The bottom line: Mexico will become even more unstable and its oil sector more depleted and undermined as more and more Mexicans will stream across the border to the US. Hugo Chavez to the south will rub his hands with glee as Mexico’s turmoil adds to the oil ‘risk premium’, enhancing his own geopolitical clout. In one way or another, all this adds to the US’s problems.
Michael Orme is a financial journalist, former stockbroker and associate for an institutional investment advisory firm.
Sign up for The Fleet Street Letter today.
First published on November 10th 2007
Get the day’s big financial news in one easy hit! Fleet Street Daily gives you the financial stories that matter. If you’re an investor, you’ll know the importance of staying on top of the news. Every day brings new events, and those events are what move the markets. With Fleet Street Daily you’re one step ahead of the crowd. Because we don’t just tell you what’s happened — we tell you what it means and what you should do about it. Fleet Street Daily is a lively, relevant and entertaining resource designed to help you make smarter investment decisions. Best of all, it’s 100% FREE! So sign up today!
Related articles on oil:
The Curse of Black Gold - 05/08/2006
As a general rule when the price of crude oil rallies, the price of gold tends to follow suit. The link is straightforward. Gold is seen by some investors as the ultimate hedge against inflation. So as energy prices rise, industry and transport costs rise, inflation goes up and so does demand for gold bullion. But there is another link, which is less well known. Gold is often regarded as a “safe haven” asset in times of global political uncertainty.
The War On Iraq: Don’t Expect An Oil Price Spike - 22/02/2006
Iraq is not a major oil producer although it has the second largest oil reserves in the world. There are three further reasons for optimism about the oil price in the event of war. Firstly, Saudi Arabia is expected to increase production by up to 1.5m b/d. Secondly, the oil workers strike in Venezuela appears to be coming to an end. Thirdly, since war is unlikely to happen before March or April, warmer spring weather in the Northern hemisphere should reduce demand for oil by about 1m b/d. Although the direct military costs are expected to be relatively light at between $50bn and $140bn, the occupation and nation building costs could be considerable. The American occupation is likely to be short-lived and as inexpensive to the American taxpayer as possible.
Oil Sector Will Continue To Pump Profits - 07/03/2008
Oil demand over the past 10 years grew 1.5 million barrels per day - and costs to find new oil keeps rising and rising. New sources of oil are likely to be found in logistically difficult (and expensive) areas such as deep water and in Arctic/Antarctic regions. There will also be a greater reliance on heavy and sour oil, which needs more refining. According to Reuters, the current consensus oil forecasts is in the mid-$80 area. With the dollar continuing to plunge (which fuels speculation), geopolitical concerns rising and demand being driven by population growth and increasing affluence, I believe that the triple-digit oil age has arrived – and it is here to stay.
Does Deepwater Oil Discovery Disprove The Peak Oil Theory? - 21/11/2007
Brazil's government and the state-run oil company Petrobras has announced that exploration of its Tupi offshore field showed it had enough to increase national oil reserves by a staggering 50%. I believe the oil was discovered because deepwater exploration technology has come on leaps and bounds over the last ten years. This has led to some peak oil detractors pointing their fingers in delight...
Can The US Stop Mexico's Mining Boom? - 10/03/2008
Only in Canada is "mining" Mexico’s main claim to fame. Yet Mexico is one of the oldest mining countries in the world, and it is booming. Getting on for 100 Canadian mining companies are leading the foreign rush for Mexico’s precious metals! They have around 375 projects there, 80% of the total new projects currently underway. Investment in Mexico’s mining industry totalled around $428m last year. Most of that was from Canada...
Useful links on oil in Mexico:
Oil groups suffer Gulf of Mexico setback - Disappointing oil exploration results in the Gulf of Mexico are upsetting the hopes of US oil majors for big new findings in an area free from interference...
Mexico's 69-Year-Old State Oil Firm Facing Threats to Its Stability - MEXICO CITY, March 16 - Depleted reserves, crumbling pipelines, outdated technology and billions of dollars in debt...
Mexico Energy Data, Statistics and Analysis - According to the Oil and Gas Journal (OGJ), Mexico had 12.4 billion barrels of proven oil reserves as of January 1, 2007. Most reserves consist of heavy...
Cantarell Field - Cantarell Field or Cantarell Complex is the largest oil field in Mexico and one of the largest in the world. It was discovered in 1976 by a fisherman...