Baker Institute: Mexico could become oil importer by 2020

By OGJ editors
HOUSTON, Apr. 29
-- Without sufficient investments in oil field development and the use of new, advanced technologies, Mexico faces becoming a net oil importer in 10 years, according to research by Rice University's James A. Baker III Institute for Public Policy and Oxford University.

Were state oil company Petroleos Mexicanos able to develop fully its oil in line with international standards and technology, Mexican citizens could earn $1,055/capita/year by 2020, vs. $546/capita/year if current trends continue, the report said.

Mexico’s oil production peaked at about 3.9 million b/d in 2004. Since 2005, output has fallen by more than 25% to 2.98 million b/d in 2010.

Mexico faces not only falling production but also rising demand.

Demand for oil in Mexico has grown to 2.15 million b/d in 2010 from 500,000 b/d in 1971, with some variability in between reflecting changing economic conditions. Currently Mexico is a net oil exporter, with total net exports in 2009 averaging nearly 1 million b/d.

Long-term goals
The study found that Mexico has three primary long-term objectives for its oil. These are to retain ownership and control of its resources, to protect the national economy from external shocks and predation, and to distribute any surpluses generated from this national patrimony to benefit the Mexican people as a whole.

Although these goals could generate conflict, a more equitable distribution of oil revenues could eliminate the country’s poverty and thereby create more grassroots political backing for energy reforms. Instead, existing federal spending practices benefit Mexico’s wealthiest citizens, the authors concluded.

Mexican leaders are aware of the potential problems caused by falling oil exports and rising public expectations, and Pemex has taken steps to slow the declining production by increasing investment in two newer fields. However, the study warned, enhanced recovery techniques for both onshore and offshore oil take years to have an effect.

The study questioned whether Mexican leadership has the will and the ability to reach its long-term energy goals, as the status quo is advantageous for many with vested interests.

"Political decision-making in the Mexican energy sector, like in many democratic societies, can become highly captive of vested interests, with outcomes that are less than optimum for the stakeholder, in this case, the Mexican people."

Rate of revenue decline
The final determination of the study is that the decline in Mexican oil revenues will likely be gradual rather than swift and reduce the chances that a sudden crisis would create the political will to make tough choices or unpopular reforms.

For example, the authors say, if Pemex is able to maintain production levels through new finds and better efficiency, it can postpone an export crisis for 3 decades. But even with a longer timeframe, it is not assured that Mexico will undertake an orderly adjustment. Instead, it can generate incentives to postpone it or adjust to the decline in government revenues through the least-costly short-run solution, such as cutting public investment, which might also generate the greatest adverse effects in the long run.

Oil revenues have comprised 7-10.5% of Mexico’s gross domestic product in recent years. The Mexican economy is therefore not as dependent on oil as the major exporters of the Middle East, where oil production is worth more than the non-oil economy, or Venezuela, where oil comprises up to one third of GDP.

Still, the Mexican government relies on the oil industry for 35% of its total revenues, including taxes and direct payments from Pemex. Mexico’s President Felipe Calderon has pushed for energy reform for his country, but more reforms will be needed for Mexico to reverse its current path toward importer status, the report said.

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