High US Oil Supply can Handle 2009 Mexico Oil Decline

oiltanksToday’s EIA petroleum report shows that storage of all major petroleum products are now above average. Even the prospect of lower oil supplies from Mexico don’t threaten our situation through the summer. Higher oil prices the last few years drove a domestic drilling boom that is finally paying off through a substantial increase in US oil production. The question is, how long will US oil production be able to offset lower supplies from Mexico?

Mexico’s national oil company, PeMex, reported their February oil production fell further to a level that is .25 million barrels per day (Mbd) [or 7.6%] lower than last February. This is mostly due to rapid decline in the country’s biggest field until recently, Cantarell. When natural gas liquids are included, Mexico’s oil production stood at just above 3 Mbd. After Mexico consumes ~2 Mbd for itself, this lower production means that oil imports from Mexico are reduced by almost .25 Mbd (~20%) and may fall below 1 Mbd within a few months.

But US crude oil production is picking up the slack for now. This past week, output was more than 5% higher than last year (an increase of ~.4 Mbd). Domestic production is poised to pass 5.5 Mbd in the weeks ahead.

But as I wrote about regarding natural gas last week, the falling rig count threatens future oil output levels too. By late 2009, the almost 50% fewer active drilling rigs today may translate into lower US crude production. If output falls back to ~5 Mbd (~7 Mbd including natural gas liquids), lower Mexican oil imports may begin to bite our overall supply.

But the other puzzle piece is demand. Last week, demand for all major petroleum fuels (from crude for refining to gasoline, distillates, and propane) was significantly below last year. And the recession will probably last for at least another several months. So, if oil demand remains lower, our oil supply should be fine through the Fall. Then we will have to see how far Mexican and US output has fallen and whether OPEC maintains strong compliance to their current low production levels. We could be in for another wild oil price ride if oil field declines (especially in non-OPEC countries) get the upper hand at that point.

Bottom Line: Low demand and high US oil production makes our current position luxurious compared to the tight supplies of just a few months ago. But this by no means points to a perpetual trend. For us to prepare for oil supply constraints in the future (and to mitigate dangerous climate change), efficiency and renewables deployment will continue to be crucial for long-term security and prosperity.

Onwards in the Sustainable Energy Transition-

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