Oil Prices Promise to Head Higher As Mexican Production Dwindles

In addition to Iranian threats and growing demand, dwindling production of crude in Mexico promises to push oil prices higher as well.

Mexico is the third biggest exporter of oil to the United States. That's bad news for the U.S. economy which always gets hit when oil prices rise.

From 2004 to 2008, the U.S. Department of Energy reports such jolts, along with OPEC price manipulation, cost roughly $1.9 trillion. Plus, a recession followed each major blow.

According to the U.S. Energy Information Administration (EIA), Mexican oil production reached a peak of 3.2 million barrels a day in 2008. And by 2011, it wasn't even producing 3 million barrels a day.

Since then oil production has slipped to 2.5 million barrels a day.

Worse still, Mexico could actually become a net importer of oil within a decade if it cannot find fresh discoveries to make up for the 25% production drop since 2004 and fails to change its current policies.

Higher Oil Prices Worldwide

Mexico is currently ranked No. 7 on the list of the world's top oil producers, so less Mexican oil production would also mean higher oil prices worldwide. The loss of Mexico's 1 million barrels a day in exports over an extended period would be a greater blow than the total lost due to sanctions on Iran.

While the effects of Mexico's lagging oil production are clear, the causes are more complex.

The root of the problem is years of neglect and a government-enforced monopoly. Nationalized in 1938, Mexico's oil industry has prohibited oil behemoths like Exxon Mobil (NYSE: XOM), BP (NYSE ADR: BP) and others from taking any sizable stake in the country's oil operations.

If it allowed more investments from international oil companies, Mexico could revive production, industry analysts say. But that won't be easy.

Petroleos Mexicancos, PEMEX, has sole control of the Mexican oil industry and doles out over 32% of its revenue to Mexico's government.

But while the Mexican government likes the oil revenue, it has failed to re-invest enough money back into the industry. Mexican lawmakers have long resisted providing PEMEX with the funds needed to find new sources of crude.

Attempts to Fix Oil Production Half-Hearted

Of late, PEMEX has moved to relax its oil monopoly, allowing foreign firms to bid for PEMEX contracts. Aspokesperson for PEMEX said these new efforts, in addition to the current doubling of its budget, would allow the company to quickly boost production.

But PEMEX's director of operations Carlos Morales told Reuters the company is extremely cautious and prudent when calculating the prices it is willing to pay firms to develop oil field as agreed on in new contracts.

"We can't leave money on the table. We also can't set very low prices... because we may be left without any offers, just like what happened with [oil field] Arenque."

The inability to auction off the Arenque oil field raises the question of just how committed PEMEX is to expanding private sector involvement. As long as PEMEX drags its feet, Mexican oil production will keep slipping.

"The next government may want an opening, but PEMEX loves being a monopoly," Miriam Grunstein, an energy researcher with Mexico's CIDE Institute, told Reuters.

But because oil is so vital to the Mexican economy, both PEMEX and the Mexican government may eventually be forced to adjust their thinking.

"The fact that Mexico's production is rapidly declining could potentially cause a financial crisis not only for PEMEX but for the government," Enrique Sira of energy consulting form IHS told the NYT.

"As you lose Mexican oil, you lose critical supply. It's not about energy security but national security, because our neighbor's economic and political well-being is largely linked to its capacity to produce and export oil," Jeremy M. Martin, director of the energy program at the University of California, San Diego told The New York Times.

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