Sunday, July 18, 2010

oil's well that ends well

I recently received an email from a friend who lives part of the year in Mexico.  She was very upset at the destruction that followed Alex as it blew through Monterrey and across the Rio Bravo.

Her suggestion for relief?  "Let Mexico pay for it out of its vast oil riches."

I run into this misconception quite often.  If Mexico has oil, it must be as rich as Saudi Arabia.

It is true that Mexico stumbled onto oil riches in 1976 when oil revenues started flowing in from the wells in the Gulf of Mexico.  What had once been a struggling economy had an opportunity to become a middle income country.

But those days may be drawing to a close -- soon.  Because the oil is running out.  And not the way the Macondo oil is running out. 

Running out as in tank empty.  Pull over to the shoulder.  You are not going any further.

And Mexico is in danger of seeing the tank start dropping to empty -- as soon as two years from now.  If not sooner.

Analysts have known for some time that Mexico’s biggest oil field, the Cantarell field, is in terminal decline.  As the supply declines, Mexico may not produce enough petroleum for internal consumption.  Within a year or two, Mexico may turn into a net importer of oil.  Almost as if Italy needed to import Spanish olive oil to meet its culinary needs.
The analogy is not that uneven.  Mexico relies on petroleum for its business structure -- and for social stability.

Mexico's electricity is fossil fuel dependent.  Almost 90%.  Even though the country has grand plans to reduce that amount by 25% with renewable energy sources, that day is far in the future.  After the wells run dry.  It is difficult to develop a middle-income economy without a power source.

More frightening -- Mexico's budget is oil thirsty.  40% of the country's revenues are provided by Pemex, the national (and nationalized) oil company.

President Calderón attempted several reforms to revitalize the oil industry.

Mexico has never had adequate refineries for the petroleum it produces.  As a result, most of the oil is refined in Texas and returned to Mexico.  The refinery in Mexico is almost a caricature of unions gone bad.  The rate of output is far below that of the Texas refineries.  As a result, the end cost is much higher than it needs to be.

When President Calderón attempted to reform the operation of the refinery and to allow foreign companies to assist Pemex in searching for deep water sites, the conservative forces in the House of Deputies bottled up the bill.

As a result, the oil runs dry, the refinery soon will stop refining, and Mexico will face a drastic budget crisis.

Even with the BP spill, Mexico is interested in developing the oil fields in deep water.  But it will need foreign assistance to explore.

Mexico celebrates the centennial of its revolution this year.  A revolution that resulted in a one-party state and the nationalization of its natural resources.

One party rule came to an end with the Fox presidency in 2000.

Maybe 2010 will see another step in that revolution as Mexico frees its economy to meet the challenges of the twenty-first century.

Necessity may be the mother of invention -- even when ideology is involved.


Anonymous said...

I have never understood why refineries were not built in Mexico back in the 70's when oil was discovered. Was it lack of money? Outside influence? Thirty years of exporting (crude) and importing gas and oil must have cost many times the cost of building their own refineries.

norm said...

The oil Mexico is pumping now is from one of those no-brainer type fields, The stuff was leaking out so bad that it was forming natural slicks on the ocean's surface, pretty easy to find. My guess there is a lot more but it is going to take real investment to find it and produce it for profit. They have been picking the low hanging fruit, I think they are going to have buy a ladder to get the rest of their crop.

Nita said...

If the info I was told was correct,it was that tourism followed the oil industry as the second best money maker. Is this still true or has tourism fallen off?

Howard said...

They have found more oil - just in small pockets and deeper, so hard to bring to market. They are building more refinery capacity - but is it hugely expensive. The current president's struggle to modernize Mexico and the economy has not generally been supported by the opposition who hold the votes, but they are predicted to come back to power in 2012 so they will live with the consequences.

Felipe said...

It was not the conservatives who blocked elements of reform of the oil industry here. It was the Lefties. Calderón´s PAN are the conservatives.

Steve Cotton said...

Francisco -- I have read about the decision to use the Texas refineries, but I cannot remember the why. I am going to look further.

Norm -- Brazil has put together an interesting consortium to develop its deep water fields. Perhaps, Mexico can pull a Lula.

Nita -- Revenues from tourism have fallen drastically over the past three years. But I am not certain what the relative positions are today. Something else to look into.

Howard -- PRI may rue the day of their own protectionism.

Felipe -- I should have been more precise. There is nothing more conservative than a leftist defending his turf. PRD was the strongest advocate of no foreign assistance in finding oil -- for ideological reasons. And PRI was opposed, in its dinosaur mode, to be certain its special interests were shielded. All under the guise of protectiong the Revolution. Perhaps, a better phrase would have been "the leftist protectors of the status quo."

Anonymous said...

Actually, it's 40% of Mexico's federal government's revenues that come from Pemex, not 40% of the country's revenues.

But that's still a very important 40%, and the day it runs out will be a very difficult day for Mexico. Because they will then have to raise taxes to fill the gap. And that won't be easy.

But most experts seem to believe it's 7-10 years in the future, so the danger is near, but not imminent.

Meanwhile, the drug cartels have no "cliff-date" for their revenues, so the exhaustion of the oil will tip the balance decidedly in their favor.

I hope Mexico survives this challenge. It ain't gonna be pretty. And there will be lots of collateral damage while things get sorted out.


Kim G
Boston, MA
Where this remains one of our longer-term concerns for Mexico.

Steve Cotton said...

Kim -- Good point. We often forget that there are federal and state budgets -- just like The States and Canada. The oil problem is coming, though, unless Mexico decides to develop its deep water fields. And that will be a revolution.