April 28, 2008
Mainstream Takes Oil Supply Problem More Seriously

A little over a week ago Jad Mouawad of the New York Times wrote a piece on rising demand for oil and worries about supplies. His piece, while drawing attention to the problem, didn't go too far off the reservation of conventional thinking. He was pretty tentative about Peak Oil. Now he's back 9 days later and Mouawad seems to be leaning closer toward acknowledging we have a big long term problem with oil supplies.

As oil prices soared to record levels in recent years, basic economics suggested that consumption would fall and supplies would rise as producers drilled for more oil.

But as prices flirt with $120 a barrel, many energy experts are becoming worried that neither seems to be happening. Higher prices have done little to suppress global demand or attract new production, and the resulting mismatch has sent oil prices ever higher.

Prices have doubled and doubled again. Yet production has been pretty flat for the last few years.

“What is disturbing here is that things seem to get worse, not better,” said David Greely, an analyst at Goldman Sachs. “These high prices are not attracting meaningful new supplies.”

Mouawad even quotes Jeffrey Rubin of CIBC World Markets who I've recently posted about for Rubin's prediction of $225/barrel oil by 2012. Rubin effectively interprets the writings of Peak Oil theorists into language that the financial community understands.

Mouawad takes note of Mexico's plunging oil production.

Mexico, the second-biggest exporter to the United States, seems increasingly helpless to find new supplies to offset the collapse of its largest oil field, Cantarell. A combination of falling production and rising domestic consumption could wipe out Mexico’s exports within five years.

Mexico's rapid decline from its oil production peak deserves mention in the New York Times. But Mouawad could have been even more dramatic: Mexico's oil production is tanking while strong internal demand growth is causing net exports to drop even faster.

Mexico's gasoline imports rose to 360,700 b/d in March, the highest level since November 2007. This coincided with a 7.8% decline in the country's oil production in this year's first quarter to 2.91 million b/d, largely due to declining output from traditional oil fields.

Mexico fits a larger pattern. Rapid domestic oil consumption growth in big oil producing countries cuts down oil available for export. The New York Times has noticed the oil export problem as well. Some analysts call this the Export Land Model. At that link petroleum geologist Jeffrey Brown speculates that most of the remaining recoverable oil will not get exported. This collapse in available exportable oil could make the 2010s the most tumultuous decade since World War II.

Share |      Randall Parker, 2008 April 28 10:09 PM  Energy Fossil Fuels


Comments
cancer_man said at April 29, 2008 12:27 AM:

From the end of the article, which most won't read:


"Not everyone is pessimistic about energy supplies. A study by the National Petroleum Council, an industry group that provides advice to the secretary of energy, concluded that the world still had plenty of petroleum resources that could be tapped.

In fact, high prices have set off a global dash for oil. Brazil, for example, has struck large offshore fields that could turn the country into one of the world’s top 10 producers. But developing new fields can take many years.

To make up the shortfall, the world is also increasingly turning to fuels from unconventional sources, like biofuels or heavy oil. Canadian tar sands, for example, have attracted large investments."

Brock said at April 29, 2008 7:50 AM:

Mexico and other producing countries will only measurably "consume but not sell" oil if they impose punishing export tariffs on oil. Otherwise Mexicans will have to buy oil at the same price everyone else does. It's a fungible, global commodity after all.

Put another way, why would the Mexican Oil Co. sell oil for $80/bbl in Guadalajara when they can get $120/bbl in Texas? Even if they do sell it to Guadalajarans for $80/bbl, what's to stop them from reselling it in Texas for $120/bbl?

Some countries will impose export restrictions, but not all of them. Given NAFTA and strong economic ties, I don't see Mexico and Canada cutting exports to the USA and threatening to take down our economy in the process. They'd get killed by the aftershocks of that and they know it.

Mirco said at April 29, 2008 9:05 AM:

Another point to consider: the "exporter" sell oil to buy stuff. If they stop to sell oil abroad what they will use to buy stuff?
Without the $ (or the €), the exporter will not be able to buy goods in the EU or in the US. Goods like drugs, food and many other things and services.
So, the "Export Land Model" has its limits. And they are big.

David Govett said at April 29, 2008 9:48 AM:

Fortunately, it would seem, the weakest countries control the largest oil reserves. One can readily imagine the major energy consumers appropriating and allocating among themselves the Middle Eastern oil reserves. Necessity is the mother of intervention.

Mirco said at April 29, 2008 1:41 PM:

There is no need to "appropriate" the oil reserves.
When Armadinejad tell to the press "Oil right price is 200$" must be understand as "I need oil at 200 $" to stay in power or my power will crumble.

Randall Parker said at April 29, 2008 8:05 PM:

Mirco,

Can you think of any nations that went thru a big decline in oil production and didn't stop exporting? Russia maybe.

David Govett,

I do not expect a new colonialism to lead to Western seizure of Middle Eastern oil.

Brock,

Mexico is already exporting less and Mexican oil exports will continue to decline. Remember that as production declines prices will rise. So producers will be able to sell less to make the same amount of money.

aa2 said at April 29, 2008 11:21 PM:

Export land model is an important observation. I live in Canada and I'm glad we put fairly substantial taxes on oil. A gallon of oil here is about 4.80 right now. This way we gain more dollars to spend in the global economy, and our government has a big revenue source. Of course there are limits to how high you can push the taxes before you run into other problems.

David Govett said at April 29, 2008 11:25 PM:

Randall:
Hungry and cold people will to do things fed and warm people will not.
It's only because you have been comfortable for so long--perhaps your entire life thus far--that colonialism seems inconceivable to you.
Things could fall apart faster than you might imagine, especially if the American lifestyle is becomes unaffordable.

John Lukan said at April 30, 2008 7:47 AM:

More thoughts about the decline in Mexico's oil production from Strategic Forecasting

Stratfor: Global Intelligence Brief - September 20, 2007

Mexico: Calderon's Overhaul Moves Ahead

Summary

The Mexican Congress approved the final portion of President Felipe
Calderon's fiscal reform package Sept. 17. The move gives Calderon
a boost he will need for the next stage of his reform plan:
changing the constitution to revive Mexican state-owned energy
company Petroleos Mexicanos.

Analysis

The Mexican Congress approved the final piece of President Felipe
Calderon's fiscal reform proposal Sept. 17. The plan restructures
Mexico's tax code with the aim of generating nearly $10 billion of
additional revenue in 2008. Pushing this reform through is a
massive success for Calderon in a country that has historically
struggled to achieve fiscal reform. By allowing the government to
move away from its reliance on Mexican state-owned energy company
Petroleos Mexicanos (Pemex) for much of its operating revenue,
Calderon has taken the first step toward reviving the ailing
national champion -- a task that will entail the challenge of
revising the Mexican constitution.

Calderon came into power in Mexico with a razor-thin margin, barely
beating his leftist opponent, Andres Manuel Lopez Obrador. However,
Calderon started taking action soon after gaining the presidency,
forming a coalition between his own party -- the National Action
Party (PAN) -- and the powerful Revolutionary Institutional Party
(PRI). His first major move was to wage an offensive against the
drug cartels that have rendered much of Mexico effectively lawless.
Whether Calderon can actually tame the drug trade remains an open
question -- but because previous presidents have not taken
prolonged or effective action against the cartels, Calderon's moves
have boosted his popularity.

His second major initiative, which has been shaping up for some
time , involves taking on one of Mexico's other major problems:
fiscal viability. Forty percent of government revenues come from
Pemex -- but in diverting Pemex profits, the government has
inadvertently crippled the company's ability to expand its oil
production. As a result, Pemex is facing the prospect of declining
levels of production -- and with them, both Pemex and the federal
government face disintegrating fiscal opportunities.

Calderon's tax plan relieves the pressure on Pemex by targeting
private-sector businesses instead. Much of the business community
has heretofore avoided paying taxes through a variety of legal
loopholes in a chaotic, complex and convoluted tax system. Under
Calderon's proposal, this system is to be replaced with a corporate
flat tax of 16.5 percent in 2008, increasing to 17.5 percent by
2010. This restructuring makes it much easier for the government to
enforce tax compliance, and is expected to increase revenue
substantially. Normally, raising corporate tax rates would chase
businesses out of the country, but this rise is minimal at best,
with most Latin American countries sporting much higher corporate
taxes.

Calderon's plan also has incorporated two major concessions to the
left. The first was to leave a value added tax (VAT) out of the
reform -- massive opposition from the left meant the plan never
would have passed with a VAT included. This keeps the pressure of
higher taxes off of Mexico's poor, a demographic that largely
supports Calderon's rival party, the Democratic Revolutionary Party
(PRD). The second was to agree to a law that will reform the
Federal Electoral Institute (IFE). Largely thought to be corrupt,
the IFE is considered by the left to be responsible for Calderon's
narrow victory in the 2006 election. By supporting the
restructuring of the organization, Calderon gives the opposition
the feeling that something is being done to right the PRD's
controversial loss in the 2006 election. The left in Mexico is
reasonably happy with these concessions and with Calderon's
willingness to work with the PRD -- because with the PAN-PRI
coalition, Calderon could easily marginalize the left if he chose
to.

However, in order to fulfill his reform agenda, Calderon will need
as much support from the left as he can get. The next major step
for his administration will be to tackle constitutional reform.
Chief among Calderon's planned revisions is a change to the rules
guiding Pemex. Currently, Pemex is completely reliant on its own
financial resources -- participation in the Mexican energy industry
by foreigners (as anything more than contractors) is flatly
unconstitutional. In the energy business, this does not work
especially well, as companies providing technological expertise
generally want to own a piece of the project as well. The
limitation has further crippled Pemex's ability to expand
exploration and production, as the company's technological skills
are a generation behind those of the wider world.

Reform of the constitution and of Pemex will present a distinct
challenge to Calderon because the company's mandated independence
from foreign influence is a matter of intense national pride.
Whether or not Calderon is able to achieve the necessary reforms to
turn Pemex into a functional company will depend on his skills as a
politician -- but with the success of his fiscal reform, he is in a
very strong position to try.

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