Will Mexico Follow Chavez?

As in Venezuela, the Mexican government is facing the problem of declining oil production in a state whose national government relies on oil revenues for much of its operating funds.  And, like Venezuela, this is a problem that is self-imposed. 

The ignorance with which most of the media writes about oil reserves is staggering.  Most writers fall in the trap of talking about oil reserves as if they are big pools underground that will eventually be sucked dry and have a fixed recoverable size.  The reality is that the amount of oil that can be pumped from any field depends greatly on how much capital investment one puts into the field.  In the short term, wells even in perfectly viable fields will start to fall off in production unless they are reworked every so often.  Longer term, addition of pumps, water/steam/CO2 injection, drilling deeper, etc. all can greatly extend the life of fields.  There are fields in Texas just as old as those in Mexico which continue to be reinvigorated by investment.  And we continue to find new fields in the US through exploration investment, and would find more if the government did not restrict the most promising areas from exploration.  (by the way, this is why much of the peak oil analysis is BS)

The problem, then, is not that Mexican oil reservoirs are going dry but that the amount of investment required to keep them producing is rising as they age (the converse of the law of diminishing returns is the law of increasing capital investment requirement).  And the Mexican government, like that in Venezuela, is committed to siphoning off oil revenues for short term political spending and to provide gas at below-market pricing rather than reinvest the money in the fields.  In this context, the Mexican government is seeking foreign investment to help bail them out of this problem, while the socialist elements want to keep foreign corporations out.

For once, I agree with the socialists.  I see no reason why US oil companies should venture back into a country that still celebrates as a holiday the day in 1938 when the Mexican government stole the assets of US oil companies.

special recognition to the AZ Republic writer who gratuitously tried to justify nationalization of assets owned by US citizens by claiming that the US oil companies essentially asked for it by "evading Mexican taxes and paying meager salaries."  The entire history of the third world oil industry can be written as follows:
1.  US companies invest huge amounts of capital and know-how to build oil industry
2.  Once things are producing, local government steals it all
3.  Oil fields go into extended decline due to short-term focused and incompetent government management
4.  US companies invited back int to invest huge amounts of know-how and capital
5. repeat

Update: Here is a great example of why peak oil analysis is probably flawed -- such analysis assumes that the size of reserves are static.  But in fact they are not.  They can vary greatly with the price of oil, because the size of the recoverable reserves, as discussed above, depends on how much one is willing to invest in recovering them and that depends on price.

In the next 30 days the USGS (U.S. Geological Survey) will release
a new report giving an accurate resource assessment of the Bakken Oil
Formation that covers North Dakota and portions of South Dakota and
Montana. With new horizontal drilling technology it is believed that
from 175 to 500 billion barrels of recoverable oil are held in this
200,000 square mile reserve that was initially discovered in 1951. The
USGS did an initial study back in 1999 that estimated 400 billion
recoverable barrels were present but with prices bottoming out at $10 a
barrel back then the report was dismissed because of the higher cost of
horizontal drilling techniques that would be needed, estimated at
$20-$40 a barrel.


  1. Jim T:

    Right on brother! I remember reading the late Jude Wanniski where he notes that, as of 2004,

    "In the entire history of the world oil industry, a total of 4.6 million wells have been drilled, with the US accounting for 3.2 million of those!
    Africa is four times the size of the US (minus Alaska), yet in the last eight years there have been only 6,280 wells drilled on the continent while 209,400 have been drilled in the US.

    There is undoubtedly as much oil in Africa undiscovered as there has been produced in the history of the world oil industry.

    The same can be said for Latin America. As for the Middle East, Saudi Arabia has drilled only 1,000 wells in the past eight years, almost all of them production wells, not exploratory wells.

    Iraq, with the second highest total amount of proven reserves - 110 billion bbl - has drilled only 100 wells over that period.

    "Oil is of course the most important commodity in the world. For the world oil industry to stop investing in its development for almost three years was a shocking lapse"

    Which brings us back to the original question: If there is so much oil in the world, why is the price so high? The answer, simply, is that from 1998 to 2001, the world energy oil industry went on vacation."

    For some reason, Google says his old site may be harmful but I have been visiting that site for nearly 8 years with no problems. Old Jude may have been considered "out there" by some but I've always appreciated his point of view.


  2. Technomad:

    I've always thought that foreign countries' nationalization of US firms should be treated as a de facto declaration of war.

    "They thought that Uncle Sam was a clod,
    They're under the Yoke now, or under the sod,
    Consigned there with a friendly prod
    By Sweeney Todd,
    The Demon Barber of Fleet Street.
    Swing your razor wide, Sweeney!
    Hold it to the skies!
    Freely flows the blood of those
    Who nationalize!"

  3. Mike C.:

    Hydrocarbons in place (OIP, GIP) is static. "Reserves" is a strictly economic number. The general press usually flubs the difference.

    Mexico has a special problem over and above even Venezuela and most ME countries, in that not even private Mexican companies, much less foreign companies, are allowed to enter the oil business as interest owners. That is banned by the constitution. We are now on our second Mexican president that would like to change that, but who has not even a snowball's chance in hell of doing so. They are well and truly screwed. That's a damned shame, because they could be doing much better, both in maintaining rates from existing fields, and in exploring for new ones, if they only had the capital backed by the technical knowledge. IF they could change that law, Mexico would overnight become the hydrocarbon industry's # 1 choice for foreign investment, gar-on-teed.

  4. HTRN:

    Some of you might be interested to know that they're reopening the worlds first commercial oilfields. Once again, oil will flow enmasse in Oil City Pennsylvania. Apparently that the field was not economical to exploit at low prices but at $100/barrel, it makes sense. It's been reported that almost 60% of the original oil deposit is still waiting to be pumped out.

  5. John Sterling:

    A petroleum engineering acquaintance of mine confirmed to me that the production from the Cantraell field is "crumbling." He estimates that if international oil firms took over for Pemex, they could boost Mexico's output by 3 million b/d in fewer than five years.