Mexico's Oiling Days Are Numbered
Many of the world's top oil producing countries have massively underinvested in the production of oil over the past several decades, choosing to tax the heck out of producers and squeeze every last drop of revenue from them rather than encouring investment in the exploration for and development of new oil fields. Investors Business Daily published a great article a couple of days ago that further illustrates what I have been talking about (see article: Mexico's Oiling Days Are Numbered).
The piece states that Mexican oil production is dropping rapidly and without a significant change it is possible that it could cease altogether in a decade. Oil exports from Mexico could even end as soon as in five years. This is obviously a huge problem for the United States, which is already facing high oil prices and relies upon Mexico for 12% of its oil imports.
Much of Mexico's low hanging fruit in terms of oil has already been picked. Its huge Cantarell is rapidly running out of oil. In order to increase production, Mexico will have to spend tons of money to go after deepwater oil and gas. This, when combined with the fact that Brazil is hording all of the world's deepwater rigs, is very bullish for deepwater drillers (none of which I can talk about because I have either added to my positions in them recently or am considering adding to them in the future)
Despite rapidly rising prices that should encourage production, output at Mexico's state oil company, Pemex, has dropped 20% over the past three years. Fortunately, Mexico's President Felipe Calderon sees this potential problem coming and he is trying his best to reform the country's oil industry and increase production.
Unfortunately Pemex currently lacks the capital and expertise to go after these deepwater deposits without outside help. However, when Mexico nationalized its oil industry in the 1930s it passed laws forbidding foreign investment. Calderon realizes that the country needs to seek outside help, but he is facing huge opposition from the Mexican Congress. In early April, Calderon submitted a bill to them that would take a step towards modernizing Mexico's oil industry, but rather than take a vote on it the Congress chose to shut down for two weeks. In fact, rather than even debate the bill Congressmen chose to rally large crowds against it. Many Mexicans view Calderon's forward thinking actions as being unpatriotic.
If things don't change in Mexico, and change quickly, one should strongly reconsider putting any investment dollars to work there. The country currently derives 40% of its tax revenue from oil. The elimination of this source of income could be a disaster for Mexican investments andeven more bullish for oil.