Oil Prices Rise; Mexican Collapse

It’s good to see oil prices on the rebound – up over $48 per barrel as of mid-day Monday. That’s an eight-week high and attributable to OPEC’s apparent decision to tighten oil supply by cutting off an additional 800,000 barrels of oil daily, if the rumors I’m hearing are true.

OPEC meets on March 15, and one inkling about what OPEC might do comes in the form of two quotes of note in today’s business journals.

First, the “dramatic drop” in oil prices has been greater than warranted by the decline in global demand, Venezuelan Finance Minister Ali Rodriguez said yesterday. Then, OPEC said it had to cut 800,000 barrels a day to meet its commitment to reduce output by 4.2 million barrels since September; that according to Secretary General Abdalla el- Badri said in Qatar today.

Those comments led to an inevitable round of predictions from oil industry observers, most of them along the lines of this quote from Lawrence Eagles, global head of commodities research at JP Morgan Chase.

“OPEC has stopped the development of large surpluses and is responsible for a tightening of supply. The signs are that they have already decided to announce an additional cut.”

I’ll have more on what OPEC decides to do next week, after the March 15 meeting. For now, I have another, more long-term issue to put on the table.

According to a new report from the U.S. Pentagon, global terrorism, along with powerful, regional drug lords are taking a huge toll on sector-specific oil markets. The Pentagon report goes as far as to say there is a fair likelihood that the weakening economic underpinnings in places like Mexico and Venezuela could pave the way for the breaking up of these countries – with serious ramifications for the global energy sector.

Says the Pentagon; “Expect severe shortages globally. By 2012 surplus oil production capacity could entirely disappear and as early as 2015, the shortfall in output could reach 10 million barrels a day."

"The implications for future conflict are ominous," the report adds. "If the major developed and developing states do not undertake a massive expansion of production and refining capabilities, a severe energy crunch is inevitable."

Mexico, very close to where I am in Texas, is a big producer of oil. In fact, oil is the single most crucial revenue stream for the increasingly beleaguered Mexican government. 40% of total government revenues – that’s not a typo – are tied to the country’s oil production. Mexico is also the third-largest provider of oil and gas to the U.S., so any significant decline in oil production would reverberate well above the Rio Grande.

Mexico’s largest oil field (it provides 60% of the nation’s oil supply), the Canterell off the Gulf of Mexico, has experienced significant declines in oil production every year since 2004. Oil production peaked in 2004 and has fallen about a third through 2008. Mexico is obviously very reliant on Cantarell for its economic health.

Right now, Mexico is stable – although that may not last. Government officials smartly locked in bulk oil sales at $70 a barrel a few months ago. But those contracts expire at the end of 2009, and after that, the picture grows darker for Mexico. Studies show that if Mexico had to sell oil at around $40 or $45, it would lose 20% of its gross domestic product.

It’s not just Mexico. Venezuela, for example, has to have oil selling at above $120 per barrel to carry the cost of all of its social programs.

That’s why I’m worried about the impact of any government collapses in these countries on U.S. and global oil prices. It’s not a good scenario, and fragile governments like Mexico and Venezuela are way too reliant on higher oil prices.

We’ll know more by the end of the year, but this is one issue that we need to keep our eye on.





Posted 03-09-2009 4:31 PM by Bret Boteler

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Pentagon warns of “severe shortages” by 2012 : Bret L. Boteler wrote Pentagon warns of “severe shortages” by 2012 : Bret L. Boteler
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