Mexico oil production in freefall, next President better prepare for peak oil

Mexico just reported that their production continued to rapidly decline in September. Cantarell production was 36% below a year ago at only 940,000 barrels per day, and total crude production was down 14% from last year at only 2.722 million barrels per day (Mbd). This was the lowest level since 2.55 Mbd in November 1995. Exports were down 37% from last year. The slide in production could finally be felt by PeMex and its home country since oil prices were back down toward year-ago levels. This lower production will seriously rock the federal budget of Mexico in the months to come — especially due to exports declining faster than production declines as domestic demand rises. Some Mexico production was shut-in over the last few days of September due to lower demand after Hurricanes Gustav and Ike shut down numerous US refineries. This reduction continued until October 9th, so Mexico’s October production numbers may come in even lower than those in September before some recovery likely in November.

The next few months will probably not witness new record global prices due to low recession demand almost everywhere (even China had 1.1% lower 3rd quarter GDP growth, though it was still at 9%). But the quick declines must be noted by our Presidential candidates as they prepare to govern over the next 4-8 years. Assuming the next President lasts for both terms, it is highly likely that the harsh reality of peak oil will become apparent under their watch. By the end of Obama or McCain’s Administration, imports from Mexico, Norway, Russia, and the UK (the source of almost 2.5 Mbd [18% of our imports] last year) will likely disappear as their production declines more than our 2007 import level. Sure, there are some prospects to replace these lost imports such as Brazil, Azerbaijan, Kazakhstan and Canada. But China, India and many others will be clamoring for their oil as well. Thus, modernizing our transit systems and becoming a leader in efficient and electric vehicle production should be a substantial focus for the incoming Administration.

Richard Heinberg wrote last week that he thinks July 2008 will be the global peak of crude oil production, due to the credit crisis slowing financing for new projects and OPEC’s upcoming cuts. He says the rapid decline of Mexico’s Cantarell will be mirrored in a growing number of other large mature fields worldwide in the coming years. Replacement fields will likely be smaller and more expensive to develop, ultimately yielding a lower global output.

Whether Heinberg proves correct, most oil analysts I follow believe that peak production will occur by the end of our next president’s second term, 2016. Obama’s platform concentration on demand reduction makes more sense than vain attempts to “drill, baby, drill” for significant increases in US production. Within a few short years, we will likely need to lower our oil demand faster than oil production declines, a rate as high as 5% per year though probably lower at first. Without success in lowering our demand, 2008′s record prices and Southeast gasoline shortages are likely to be eclipsed by the end of McCain or Obama’s Administration.

The silver lining: lowering oil demand not only fixes the oil crisis but it is also a critical element of our climate change mitigation to slow the melting of ice sheets around the world.

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