Coming to you from the edge of Giants Playground in CO’s Lost Wilderness. Today we’re talking about Mexico’s energy sector.
As I was heading out on this trip, a fire broke out in Mexico’s Cantarell oil field, which has long been Mexico’s largest oil-producing asset. However, even before this fire, oil production from this field was already down to but 1/8 of peak production.
The Cantarell field was developed over a century ago and has accounted for most energy production in modern Mexican history. This meant Mexico never had to develop the infrastructure or workforce for a broad-based energy sector.
Even though Mexico has plenty of accessible oil fields, they can’t develop them due to a lack of skill and strict anti-investment laws. So energy production in Mexico is falling off, and there’s no reason to expect that to stop anytime soon. Within a few years, I expect Mexico to become a net energy importer (with most of that being refined product coming from the US).
But it’s not all bad…Mexican energy production might be slowing, but consumption is also rising. And thanks to NAFTA, Mexico is tied at the hip to the US. So even without a strong energy sector, Mexico’s future still looks bright. If government officials would stop lining their pockets and put that money where it should be, Mexico’s future could be even brighter.
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TRANSCIPT
Hey everybody. Peter Zeihan here. Coming to you from the edge of the Giants playground in Colorado’s Lost Wilderness. Today, we’re talking about energy in Mexico. Specifically, just before I left on this trip, there was a fire at the Cantarell offshore oil field, which has long been Mexico’s single largest oil producing asset. At its peak, it was producing about 2 million barrels a day. It’s down to less than an eighth of that now. And that was before the fire. Probably talking about about 150 right now as – 150,000 barrels per day that is – as they go through recovery operations.
Now, the Cantarelll was originally developed over a century ago, and it’s unique as formations go in that it’s a giant, basically a volcano with all the pressure building to the top. And so all you have to do is put a few holes in the cap rocket attack offshore and the pressure does the rest. You can see every well that taps the controls to per field from all of the other wells. And it has been the mainstay of Mexican energy production for the entirety of modern Mexico’s history. That means that we’ve got a problem here. The Mexicans never had to develop what you consider a broad based energy sector, and so they never had to really develop the intellectual capacity and the labor force to do broad scale oil production in multiple zones. And so there’s a lot of oil production in Mexico that by global standards would be very easy to develop. But the Mexicans absolutely lack the techniques and the skills and the capital that is necessary to do it themselves. In addition, they have the world’s most draconian anti investment laws. Makes it almost impossible for anyone outside the United States to play. Now, as a country that borders the United States, those laws were set up with the idea of keeping the Americans out because they see that as a geopolitical weakness. I can see that point from them, their point of view. But it does mean that Mexico has seen their energy production drop bit by bit by bit for decades, and there’s really no hope to expect it to reverse anytime soon, even though they do have some super fields, some of which are onshore, they just can’t develop them themselves.
Now, there’s another problem because of the general incompetence of the Mexican state oil company Pemex. Mexico also is one of the world’s largest importers of refined product, even though they’re still technically a exporter of crude. And every drop of that comes from the United States. It’s gotten so bad in recent years that Mexico, at least on paper, is actually using more American refined fuels than they generate for themselves. The current government, under AMLO, that’s Lopez Obrador, is his last name, is building a refinery that honestly, they probably don’t know how to operate. And even if they did, it’s kind of hard to have confidence that it’s going to work because they already have refineries that are doing horribly. So we’ve got a bit of a boondoggle where the money should have been spent on things like, I don’t know, skills development that is estén instead going on white elephant projects that are designed to make Mexico City sound good to itself.
Where this takes us is Mexico is in basically a not so slow motion collapse as an energy producer of any type. And within the next few years, Mexico will certainly be a net energy importer no matter how you’re going to run the math. Now, that’s not as bad as it sounds. It’s not just the production that is falling. It’s also consumption that is rising. Remember that courtesy of NAFTA, NAFTA to Mexico or the United States are bolted together at the hip. And. Whereas, the United States is really good at the high end labor stuff for things like semiconductors and tech design, it’s also really good at the low end stuff would use a shale revolution and turns it into things like precursor materials, plastics. Mexico’s good at everything in the middle, and it’s value add is arguably the best in the world. So it’s not that the Mexicans don’t have skills. They just don’t have energy skills in the state monopoly sector. So it’s perfectly capable for Mexico to have a successful future, even as it becomes more and more vulnerable to anything the United States does in energy. Now, with a country that is literally leaking mechanics and is excellent in middle manufacturing, should we get a change in approach in Mexico City? The idea that Mexico can get back into the energy game is not, it’s not a ridiculous idea. But the current government is definitely more interested in lining its own pockets and making ideological statements than solving any of the endemic, misaligned skills and corruption issues that have plagued the Mexican energy sector for the bulk of the last century.
So at a minimum, we need a change at the top before we can get a change in the energy sector. I don’t see that happening this year. We can talk about it next year or the year after.
Alright. Take care.
