The Peter Zeihan Podcast Series - The Self-Inflicted Downfall of Mexican Energy || Peter Zeihan

Episode Date: September 13, 2024

Following its discovery in the 70s, the Cantarell oil field enabled Mexico to become a major oil producer. Decades of lax management and complacency by Pemex, Mexico's state-owned oil company, together with the declining output of the Cantarell, has left the country with serious production problems. Full Newsletter: https://mailchi.mp/zeihan/the-self-inflicted-downfall-of-mexican-energy

Everybody, Peter Zine here coming to you from Lower Ottawa Lake in southern Yosemite. And today we're going to talk about Mexican energy. The story begins over a century ago when there was a discovery called the Cantoral Field offshore Mexico. And the Cantoral is unique among oil fields and it's basically shaped like a volcano. And with the tip at the very top and the pressure pushing all the oil to the tip. So basically they were able to put just a handful of offshore production platforms above that. tip, you can see all the platforms from one another, and the pressure just continued to flow and flow and flow and flow and flow, and flow. And it made Mexico a major oil producer and significant exporter and supplier to the United States.

However, one of the threads in Mexican politics is a degree of anti-Americanism, largely because the United States is the colossus to the north, and it can get a little bit bossy. So the Mexicans actually put into their constitution that no energy asset could be operated or owned by a foreign entity. So Pemex, which is the state oil company in Mexico, is in charge of everything. Well, when you exist in that sort of controlled environment, you tend to get a little sloppy, especially when the oil comes easy. So decades turn into decades, turn into decades, and eventually the Cantrell starts to give out. and Pemex never really bothered to learn how to explore or produce more difficult fields. And so for the last 30 years, we've seen Cantrell basically fall almost to nothing now, and Mexican oil production fall with it.

While this is going on, Mexico is rapidly industrializing because of NAFTA, so its fuel needs have gone up. So they finally do loosen up some of the restrictions a little bit and allow the import of refined products so that, you know, cars, can run. And so Mexico is the single largest consumer of American exported fuels now, courtesy of the Shell Revolution. Well, in comes the president, Lopez Obrador, who is more anti-American than most Mexican politicians, and decided that this was a bad idea. So he started splurging money on a refinery in his home state of Tabasco to make it so that Mexico wouldn't

have to import refined product. Pemex. being as incompetent as it is, the project went hugely over budget. It's operational now, but here's the problem. Pemex can really only focus on one thing at a time and they don't really do the one thing all that well. So yes, they now have the refinery starting up. But oil production is tanking to the point that very, very soon, probably within two or three years, it's going to fall below the level that Mexico needs to supply its own needs. So yes, they can now refine, but they can't produce the crude. The problem is, this is, this is, isn't something where they can just turn to American fuels.

The new problem is that American oil is primarily light and sweet coming from the shale fields. Basically, shale fields are kind of like concrete, and there's little pockets of petroleum trapped in between the individual particles of the rock, and so that's why you have to frack it. You basically spider up the entire thing with cracks, and then the stuff can get out. The canterol field and most Mexican fields are much more traditional in comparison, and so the oil can migrate through the rock strata. Well, for shale, this means there are a few compatana minutes in it. That's the whole light sweet thing.

And Mexican crude is more heavy and more sour. Well, the Tabasco refinery, along with all of Mexico's refineries, were designed to run on Mexican crude. So if they end up having to import oil in order to make their own refrient product, it's not going to be U.S. shale crude. They'd have to completely overhaul the refineries for that. So Mexico has now become the one-country country. country in the Western Hemisphere that might actually be dependent upon oil politics of the

Eastern Hemisphere. For the United States, which is slowly retooling all of its refineries to run on its own crude, this has become a bit of a headache, but one that can be dealt with, especially since the United States has the capital, to change its refineries to run on its own crude. Mexico doesn't have that kind of resources. So we're probably going to be getting to a situation within a decade when Eastern Hemisphere energy flows are. interrupted, and the United States is fine. In fact, it's doing great, but Mexico is either going to have to shut down its own refineries and then bring in America and refined product again, or be subject to a crazy price environment that is subject to things like Russian shutdowns

and wars in the Middle East. So Mexico has unfortunately found a way to make itself far more exposed to any reason to be because of nationalism. How they deal with that, well, only time will tell.