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Mexico's total oil production, which peaked at 3.4 million barrels a day in 2004, fell to 3.08 million barrels a day in 2007. If trends continue, Mexico, the fifth-largest oil exporter in the world, exporting 1.9 million barrels a day, could become a net oil importer within 10 to 20 years.
Mexico does have ways to replace this production, but it will take money and technology. Developing the massive Chicontepec onshore field in eastern Mexico will require drilling 13,500 to 20,000 wells at a cost of $30 billion to $38 billion over the next 15 years, according to Pemex, the Mexican national oil company, because the oil occurs in isolated pockets.
And Pemex could install state-of-the-art pumping and separation equipment to separate the oil from the increasing amounts of water now pumped out of wells in Cantarell. That would help slow that field's production decline.
But Pemex doesn't have the money to invest in drilling all these wells or for buying this pumping and separation equipment. As in Russia, the government has used the oil industry as a cash cow. About 40% of total government revenue in Mexico comes from Pemex. And as a symbol of the country's economic independence from the United States, Pemex is prohibited from signing joint-production agreements that would let the company trade oil for the technology and investment it needs. So far, Mexican President Felipe Calderón has been unable to push a modest set of changes to the Mexican oil industry through Congress.
Questions of time and money
It's not as if the world's oil industry isn't finding new oil while production is declining in places such as Russia, Mexico and Nigeria. It's just that the oil that is being discovered is either very expensive to produce -- the production costs for oil from Canada's oil sands have crept to $65 a barrel, according to some estimates -- or is a long time away from market. Or both, as in Brazil's big recent oil discoveries.For example, a new field, Carioca, might contain as much as 9 billion barrels of recoverable oil. (To put that in context, total proven U.S. oil reserves total 20 billion barrels.) Last year Brazil's Petrobras (PBR, news, msgs) announced the discovery of the Tupi field, with a potential 5 billion to 8 billion recoverable barrels. The country eventually could wind up producing 3 million barrels a day, as much as today's Venezuela or Mexico.
Eventually.
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Getting oil out of Carioca will require oil companies to go beneath 6,500 feet of water, then drill through 9,800 feet of rock and sand, and then through 6,500 feet of salt to get at the oil. That's possible with cutting-edge technology, but it's mighty expensive and time-consuming.
Estimates of fully developing the Tupi field, which involves similarly challenging geology, run to about $50 billion. Count on a decade before these fields reach full production.
It's that gap between production declines that are continuing and visible now and production increases that are speculative and in the future that will keep upward pressure on oil prices.
In the short term, the oil market is right not to underestimate the ability of the governments of national oil producers to shoot themselves in the foot by starving their national industries of capital. We're likely to see a continuation of these self-defeating strategies among enough big oil-producing countries to keep oil prices climbing until global consumers finally say, "We can't take higher prices anymore." In that crisis, falling demand will break the upward trend in oil prices.
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Where will oil come from?The Saudis say their oil production will rise to 12.5 million barrels a day by 2009 but that they see no reason to invest billions to go beyond that, notes MSN Money’s Jim Jubak. Is it because the Saudis don’t want to increase production -- or can't? And why should we care?
For a while, anyway. The logic of rising costs of production and falling supply from cheaper conventional sources of oil argues that oil prices could suffer a temporary correction on a fall in demand but that over the next decade at least oil prices will trend higher.
The only thing that ultimately breaks that trend is the production of alternative-transportation fuels in mass-market volumes.
Do you see that happening soon in most of the world? Especially in the big markets -- the United States and China -- that really count?
Until you do, the best strategy is to hang on to your oil stocks and buy more when the opportunity presents itself.
Continued: Update to Jubak's Picks
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