Pemex and Mexican Peak Oil Equal Expensive Oil

Pemex better start exploring for more oil in the Gulf of Mexico or its going to pump out all its reserves in less than ten years. Mexican President Felipe Calderon went on national television last night in Mexico and told his countrymen (in Spanish, we presume), "We have to act now because we're running out of time and out of oil."

What's he talking about? Mexico has just over 12 billion barrels of oil reserves, or ten percent of the world's total. It exports 1.5 million barrels per day to the U.S., putting it third behind Canada and Saudi Arabia, and just ahead of Nigeria and Venezuela.

Source: U.S. Energy Information Administration

The trouble is that Mexico's government has been using the state oil company, Pemex, like a cash machine that never runs out. Pemex contributes 40% of the total tax revenues of Mexico's Federal Government. It's a resource of the people, for the people, and by geology. But you cannot print oil on a printing press. There is no such thing as "just in time" energy resources.

Mexico's government has not been investing enough in exploration or new production to top off Pemex's reserves. Those reserves are being depleted. What's more, its largest oil field Cantarell, is in an alarming state of decline. Cantarell was discovered in the Gulf of Mexico in 1976 by a fisherman. Estimates are that it was a 20 billion barrel discovery.

Mexico has been producing from it ever since in huge numbers. But those production numbers appear to have peaked in 2004 at around 2 million barrels per day. Today, Cantarell produces just 1.4 billion barrels per day-a loss of 600,000 barrels a day in four years. Overall Mexican production peaked at 3.4mbpd 2004 but is now under 3mpbd. In the first two months of this year alone, Mexican oil production fell 6.4% compared to the same time last year.

Enjoy the oil while it lasts folks. Of course, it's going to last for a very long time. Peak oil doesn't mean that all the world's oil will be gone. It means that all the world's cheap oil will be gone.

That loss will have a radical effect on economic and social arrangements that were built on cheap energy. And for nation states like Mexico (and Venezuela, and Saudi Arabia) that finance welfare states with oil revenues, it will be a disaster unless oil profits are turned into income producing capital assets-instead of merely redistributed as transfer payments...or tuned into new Towers of Babel.

"We should leave oil before it leaves us," said International Energy Agency chief economist Faith Birol in an interview with German monthly journal International Politics. There's an idea.

Birol says the world has time to make other energy plans, but not much. The rise in the oil price will be gradual he says, as a function of declining production and growing demand. "But looking at this long-term, it becomes clear that nothing changes whether oil runs out in 2030 or 2040 or 2050."

We are assuming he's referring to cheap oil and not the world's total supply of oil. Either way, the warning is unambiguous. "One day it will definitely be finished. And I think we should leave oil before it leaves us. That should be our motto. We should prepare for that day with research and development, how we can replace oil, what kinds of living standards we will be able to maintain, what alternatives we can develop."

Here here. Finding the commercial alternatives to oil is mainly what we're up to in the Australian Small Cap Investigator.

Dan Denning
The Daily Reckoning Australia

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