Re: SC50

http://www.thebusinessledger.com/Home/Archives/InTheNews/tabid/85/mid/393/newsid393/122/Default.aspx

Mexico and Oil--A Double Whammy for U.S. Economy?

............With the recent release of production figures from the Mexican government, it appears that we are now witnessing a potential collapse in Mexican oil production in the Cantarell oil fields. The Cantarell field complex is the largest oil field in Mexico and one of the largest in the world. Discovered in 1976, Cantarell has produced almost 11,500 billion barrels (b/d) of oil during its lifetime.

Earlier this year, PENMEX, Mexico’s state owned and nationalized oil company, announced that production from Cantarell fell from 1.99 million barrels a day to 1.44 million b/d, a 27 percent drop. It also announced that production from all its fields combined dropped under 3 million b/d for the first time in six years.

Despite PENMEX’s efforts to repressurize the wells, production is estimated to fall in 2007 another 600,000 b/d. Leading U.S. drilling rig executives are confirming that Mexican government officials are “very concerned” or in a “panic” over these numbers. Oil experts now think that Mexican oil production peaked in 2004 and production could lessen by 1 million b/d by 2010.

This sudden shortfall of oil has serious implications for the U.S. and Mexican economies. Mexico derives almost 40 percent of its federal budget from PENMEX’s profits. Last year revenue from Mexico’s crude exports reached an all time high 34.7 billion.

A significant drop in revenues to the Mexican economy is cause for concern since the country’s subsidies and welfare programs are very expensive. Any cuts or threat of cuts in these programs will not only negatively affect their economic and political landscape, but the currency as well. The peso should fall hard, as it always has, in past Mexican economic crises.

The U.S. economy relies heavily on Mexican oil. In 2005, Mexico exported 1.82 million b/d and most of it was to the U.S. By December 2006, oil exports had dropped to 1.53 million b/d. With a growing Mexican economy continuing to demand more domestic fuel, Mexico has already warned U.S. crude importers that it will be unable to fulfill some existing U.S. contracts.

It is estimated that U.S. imports could drop by 1 million b/d by the end of this year. A loss of that magnitude will be hard and expensive for the U.S to make up thru spot contracts on the international market.

Mexico’s dwindling production is one example, but on a world view it is just as alarming. A recent study by ExxonMobil came to the conclusion that the peak in oil discovery was in the late 1960s. After 40 years of the most advanced technological applications, no new major fields have been discovered to reverse the declining trend of discovery.

The odds are increasing that many of the biggest, oldest fields are at or near their peak production levels. If ExxonMobil’s assessment is right, the era of cheap oil is over. Despite what demand does, oil production supply, is in the process of peaking.

Should this idea of peaking oil production become a consensus view, the negative implications to financial markets or the economy are obvious...............