2008 September 08 Monday
Will Drugs And Declining Oil Cause Mexico To Implode?

Sean Maher thinks drug corruption and declining oil production could cause a collapse of Mexico.

There are two pressing issues that are putting intolerable stresses on the Mexican economy and society; the first is the huge escalation in drug related violence and corruption, as US support for the Colombian war on drugs has displaced Cartel activity into Mexico, now the primary base for cocaine shipments in the region. The revenues involved are estimated by the DEA to have reached over $40bn a year (or about 25% of all official exports), financing very effective private armies, and rampant high level corruption.

Attempts to crack down on the drugs will cut exports at a time when oil exports are already in steep decline.

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.

The oil industry in Mexico provides lots of jobs and a third of Mexico's tax revenue comes from oil. Not only will Mexico stop exporting and suffer a huge decline in tax revenue, but it will need to import oil that it can not afford to import. Currently the Mexican government collects only 11% of GDP in the form of non-oil tax revenue.

Petroleum geologist Jeffrey "westexas" Brown argues that the net oil exporting countries will export far less oil in the years ahead as declining production and soaring domestic demand cuts the amount of oil available for export. In a sort of "Always look on the bright side of life" take on this trend Brown says this development will free us from needing to placate or protect or cater to oil exporting countries.

I have good news for the GOP.

We will probably be free of Mexican oil imports by 2012. We will probably be free of Norwegian and Russian oil imports by 2025. We will probably be free of Venezuelan oil imports by 2028. We will probably be free of Saudi oil imports by 2031.

Why?

Those are the dates that I expect to see the respective countries approaching zero net oil exports, although Venezuela is a bit of a wild card. In any case the GOP is telling us that we can maintain Business As Usual, as we replace oil imports with increased US oil production and other forms of energy. The Democrats really aren't any better on energy, but I think that they are at least trying to sell us less of an energy fantasy than the GOP is regarding domestic oil production.

Think of the coming collapse of world oil exports as an energy independence program that really will work. We will not import all that oil which will no longer get exported by other countries. Calls by politicians for energy independence will finally be heeded as we find it impossible to buy much oil abroad.

My guess is that total world net oil exports in 2031 will be at 25% or less of the 2005 rate.

Jeffrey Brown expects all the major oil exporters to export far less in the coming years.

I wrote my first essay on Net Oil Exports with a guest post on TOD, in January, 2006, where I introduced the Export Land Model (ELM). I focused on the current top three net oil exporters, Saudi Arabia, Russia and Norway. They accounted for about 40% of total world net oil exports in 2005.

Here are the EIA net export numbers for the top three for 2005 and 2007:

2005: 18.7 mbpd
2007: 17.2

Of course, Saudi Arabia is currently showing a year over year increase in production, but I estimate that their 2008 net exports will be at 8.4 mbpd, or less, versus their 2005 rate of 9.1 mbpd. Norway is in terminal decline, and then there is Russia.

In our (Khebab/Brown) top five net oil exporters paper, our middle case shows Russia and Norway approaching zero around 2025, when Saudi Arabia would be exporting about 3 mbpd—which would of course be the combined net exports for the top three.

Note that net exports declines tend to approximate linear declines, i.e., an approximately fixed volumetric decline per year. If we average the initial top three two year decline, it’s 750,000 bpd per year. If we extrapolate this out to 2025, the top three would be exporting about 3.7 mbpd. Note that this is about what Khebab’s middle case shows.

Russian oil exports are declining, IMO, because they have to, if they are going to meet internal demand. While Russia has a lot of potential reserves in frontier areas, my guess is that they are to Russia as Alaska is to the US, i.e., Alaska helped, but it was no panacea.

We need a really tall barrier wall along the entire US border with Mexico to protect us from the chaos and economic hard times coming for Mexico. The world oil production decline will give us enough problems without having to take in millions of poor and low-skilled Mexicans.

Share |      By Randall Parker at 2008 September 08 10:48 AM  Mexico


Comments
Ned said at September 8, 2008 12:14 PM:

US oil production peaked around 1969 at almost 10 million barrels per day (MBPD). Currently it runs around 4 MBPD.

US oil imports were about 1 MBPD in 1969 and now are about 11 MBPD and rising.

The first real supply shock came in 1973 with the Arab oil embargo, which really didn't amount to much - the OPEC nations needed the money as much as we needed the oil. Nonetheless, the US responded decisively to the threat by - creating a new government bureaucracy (the Department of Energy) in 1977! That'll scare 'em!

Mexico, which vies with Saudi Arabia as the #2 oil exporter to the US, is probably going to cease exporting oil in the next decade. Looks like the best strategy is maximization of domestic output while developing alternative sources pronto. But I don't hear too much talk about it in the presidential camoaign.


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