Mexico: Running Out of Oil and Options

As equities commence the dramatic autumn slump I’ve been anticipating in recent weeks, it is uninspiring to witness the standard of political debate in the US Presidential election. It seems that neither candidate is aware of, or at least willing to articulate, the tectonic shifts taking place in global financial power which threaten to severely limit the room for maneuver of the incoming administration. Roosevelt said America should talk quietly to the world but carry a big stick; now a big begging bowl is more appropriate. We hear references to Iran and Russia as geopolitical challenges, but nobody is talking yet about a bigger threat right on America’s doorstep: the potential implosion of the Mexican state.


…The second crisis relates to collapsing oil production and hence state revenue; the biggest Mexican oil field, Canterell, has seen production tumble 37% in a year and down 50% from its 2004 peak, equivalent to 1.2m barrels a day. For US energy security this is a full blown emergency; this field was a ‘Supergiant’, as big as the four largest discovered in US Gulf waters combined and Mexico is currently the third largest oil exporter to the US, after Saudi and Canada.

Amazingly, Mexican production fell 10% and oil exports dropped over 16% in the first 7 months of 2008. The faster decline in exports reflects soaring domestic demand. Canterell may be down to just 600k b/d with a couple of years, with devastating implications for Mexican tax revenues; 40% of all revenues are generated by oil, and Pemex, the state oil monopoly, pays an effective 61% tax rate. The company has been plundered by politicians for decades, and the resulting underinvestment is now proving disastrous, exacerbated by the fact that foreign companies with superior technology and experience have been barred by statute from involvement.

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