Mexico, the No. 2 U.S. supplier, is unable to produce enough oil to meet the demands of its customers, especially its neighbor to the north, due to outdated national economic policies that have hamstrung its oil and gas exploration and production.
Mexican President-elect Felipe Calderon met with Canadian officials last week to hold talks on trade and explore further cooperation as Mexico's production capacity takes a sharp dive.
Although Mexico has the potential to be an energy powerhouse, the country's national oil company PEMEX lacks the investment funds to improve production in mature fields.
But as oil prices rose and production increased, the government became addicted to PEMEX's revenues, taking more than 60 percent of the company's earnings, which provide a third of the national budget, Maclean's, Canada's weekly newsmagazine, reported.
Mexico "should be an energy megastar is performing way off Broadway in terms of production vitality, because PEMEX is required to turn over the bulk of its revenues to the government. This prevents exploration, infrastructure investment, and creates debt," Vincent DeVito, an international energy attorney with Pepper Hamilton LLP in New York and former Acting Assistant Secretary of the U.S. Department of Energy, told United Press International.
Canada and Mexico are the top two suppliers of oil to the United States, with exports of 2.1 million and 1.8 million barrels per day, respectively, but the two countries are worlds apart in the development of their energy resources.
"Oil and gas will continue to be significant part of our (U.S.) energy supply and PEMEX must devise a way to allow private investment into the Mexico market in order to remain a secure supplier," DeVito said. "If not, there will be a crisis in Mexico; and, a crisis in Mexico is a crisis in the United States and, conceivably, a crisis in Canada."
PEMEX has accrued a debt and recently posted a net loss of $7 billion for 2005, despite record high oil prices.
Production is expected to face a steep decline and as things stand currently, Mexico has only 10 years of oil reserves left.
All hydrocarbon resources are nationalized under the country's constitution, and in 1938, the industry was nationalized with the establishment of state oil company PEMEX.
This is onerous for Canada, which is already producing and exporting at capacity, Maclean's reported. Although Canada plans to boost production, it cannot make up for the shortfall caused by Mexico's export decline.
The shortfall will force the United States to seek alternative suppliers, which will most likely increase prices, according to analysts.
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