New pressure on U.S. oil supply

New pressure on U.S. oil supply

August 20th, 2012 in Opinion Times

The price and availability of crude oil are two of the most closely watched economic indictors in the world. The rise and fall of international, national and personal economies are tied directly to both. That's especially so in the United States' drive-to-thrive economy that still depends heavily on imported oil to meet marketplace demand. A small hiccup in world crude oil production creates worry. Major changes bring significant concern. Sharp, recent declines in crude oil production in Mexico properly belong in the latter category.

For years, Mexico's role as a major and reliable supplier of crude to the United States was taken for granted. Any talk about oil production -- usually spurred by a run-up in prices at the pump -- centered on the Mideast and the myriad problems there or on the highly politicized debate about expanding drilling to boost U.S. production. Often overlooked in such discussions was the fact that the oil market is an international one, and that a shortage of crude in places beyond the Middle East means higher prices globally.

That's why reports of falling crude oil production in Mexico are ominous for the United States. Currently, Mexico is the third largest source of U.S. oil imports, trailing only Canada and Saudi Arabia. So far, production shortfalls south of the border have had no major impact on the U.S. economy, but continued declines coupled with expanding global demand for could change that. In that case, the U.S. would have to increase domestic production or turn to the open market to buy crude. The former would take time to become operational; the latter would be costly and likely depress the still fragile U.S. economy. Neither is an attractive possibility.

Prospects for increased production or a return to the production levels of a couple of years ago in Mexico seem remote. The country nationalized its oil industry nearly 75 year ago and PEMEX, the state run company, is riddled with problems. Its infrastructure is aging, its technology is dated and it is, experts say, seriously undercapitalized. That is unlikely to change.

Domestic politics pretty much preclude the investment of additional Mexican funds in the company. Current rules forbid international companies from even part ownership of the country's oil industry. Most Mexicans, in fact, accept the status quo because they benefit from big gasoline subsidies. Until those policies change, production will continue to fall. Indeed, some experts now predict that Mexico will have to import oil by the end of the decade.

The United States, long reliant on Mexican oil, will have to adapt to the new reality. It could turn to the world market to cover projected import shortfalls, but that is a short-term, expensive solution to a long-term problem. Better for the nation to ramp up conservation efforts and to continue to explore and expand options for alternative fuels and energy. That remains the best way to break the nation's precarious and costly dependency on imported oil.