The complexity of Mexico's problems is increasing, as the country finds itself in the middle of an increasingly aggressive drug war at the same time that its oil production is in significant decline.

According to Stratfor.com: "Oil output at Mexico’s state oil company, Petroleos Mexicanos (Pemex), dropped 9 percent in 2008 to about 2.8 million barrels per day (bpd). This is down from 3.08 million bpd in 2007, and from Pemex’s all-time high of about 3.8 million bpd in 2004." This, of course, as long time readers may already know, is due to the falling output in Mexico's major field, Cantarrell, whose "900,000 bpd is responsible for about a third of total Pemex output." But, Mexico has other problems, as "imited capability to conduct deep offshore drilling, an unstable investment climate and an energy industry subject to heavy legal restrictions."

In effect, Mexico has more offshore oil reserves that it can tap. But poor short term planning and a lack of adjustment have come back to haunt it. According to Stratfor: "Production at Cantarell, the world’s third-largest field, began in 1979. Its location in waters 100-130 feet deep off Mexico’s southeastern coast meant that Pemex did not need to develop any significant deep-water drilling capability. When it began to face the issue of declining production in the 1980s, Pemex undertook short-term measures by injecting nitrogen into the field’s reservoirs to maintain pressure. But Pemex never developed a deep-water drilling capability that would have allowed it to exploit new fields further offshore (where half of Mexico’s crude reserves are found)."

The major issues here are time and politics. Stratfor suggests that "Making up for declining production at Cantarell will be nearly impossible in the short to medium term, though. Pemex simply lacks the money or indigenous technical capability to tap deep-water offshore fields that would enable it to significantly reverse a production decline." And although some new laws will allow Pemex to hire foreign oil companies in some capacity, Pemex "faces a constitutional bar on forming partnerships with foreign oil companies that would allow foreign enterprises to own part of their oil output. This rules out joint-venture or production-sharing agreements, which are common methods of attracting foreign investment."

Stratfor further notes that "there are challenges that face this reform process. In the first place, the implementation of these reforms is going slowly, and some reforms will depend on a consensus among Mexico’s three political parties, which is nearly always a difficult process. Furthermore, the international investment climate is extremely shaky in the wake of the U.S. financial crisis and the ongoing global economic downturn. This means it could be difficult for Pemex to secure the financing it needs to hire outside expertise, and political infighting coupled with high levels of persistent corruption will not make investors more comfortable. Given these challenges, new production under the energy reform plan will be slow in coming."

Mexico is attempting to squeeze more oil out of existing fields, and is exploring offshore more aggressively. But as Stratfor notes, the going is slow due to multiple factors, mostly economic. The bottom line is that even if Mexico is able to tap into its new fields, and expand current production, Stratfor estimates that it won't have any significant increase in production until 2015-2021.

Furthermore, Morris thinks that Obama will fail miserably and that by 2010 he will have been proven to be so wrong that the Republicans will be re-elected into power, although by then it will be too late.

Conclusion

Mexico is in trouble from several fronts, not the least of which is its oil industry, which is in rapid decline. That means that the United States now has a major security problem at its southern border, and it's not just about illegal aliens.

As Stratfor puts it: "the challenge could not come at a more dangerous time" as "The country’s security situation deteriorated enormously over the course of 2008, and shows no signs of letting up. At the same time, the global economic downturn has created rising unemployment in Mexico, a pessimistic growth outlook and calls from Mexicans for the government to find solutions, and find them quickly. Should the decline in production not be counterbalanced by increased production at existing fields, or should the decline accelerate, Mexico will find itself in an increasingly unstable fiscal position as challenges mount and resources dwindle." For the U.S., unless Mexico can reverse course, things are about to get very tense close to home.

Joe-Duarte.com & IntelligentForecasts.com