Re: SC75

http://seekingalpha.com/article/94209-mexico-running-out-of-oil-and-options

Mexico: Running Out of Oil and Options

As equities commence the dramatic autumn slump I've been anticipating in recent weeks, it is uninspiring to witness the standard of political debate in the US Presidential election. It seems that neither candidate is aware of, or at least willing to articulate, the tectonic shifts taking place in global financial power which threaten to severely limit the room for maneuver of the incoming administration. Roosevelt said America should talk quietly to the world but carry a big stick; now a big begging bowl is more appropriate. We hear references to Iran and Russia as geopolitical challenges, but nobody is talking yet about a bigger threat right on America's doorstep: the potential implosion of the Mexican state.

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.

In recent months, ever more daring assassinations have included high ranking policemen and District Attorneys, including the head of the Federal police in May (equivalent to killing the head of the FBI). Criminal kidnappings have reached epidemic proportions and now threaten much of the urban middle class, and law enforcement bodies are so thoroughly corrupted that they are often complicit in these crimes.
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. Canterell may be down to just 600k b/d with a couple of years, with devastating implications for Mexican tax revenues; 40% of all revenues are generated by oil, and Pemex, the state oil monopoly, pays an effective 61% tax rate. The company has been plundered by politicians for decades, and the resulting underinvestment is now proving disastrous, exacerbated by the fact that foreign companies with superior technology and experience have been barred by statute from involvement.

Some economists estimate that Mexico will run out of oil within just 7 years, implying a near halving of the tax base just as hugely wealthy criminal warlords step up their challenge to Federal authority.

Oil exports will certainly have dried up on that timeframe. The balance of resources between the government and criminal groups will deteriorate rapidly in coming years, and the US may face a de facto criminalized narco-state as a neighbor with violence spilling across its Southern borders. Other implications would include a massive surge in illegal immigration from the current estimated 450,000 a year as impoverished Mexicans flee both declining living standards and rampant lawlessness, and the US losing energy security by becoming even more dependent on oil shipped huge distances from the Persian Gulf and West Africa.

Ironically, the success of US policies to support the Colombian government now threaten to undermine the strategically far more important Mexican one, a classic case of the law of unintended consequences in action. It will take more than that fancy new border fence or oil drilling in Alaska to address the looming crisis that will almost inevitably explode by the end of the new President's first term.................