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Chasing Minnows

July 31, 2006

Trouble in the Middle East always means trouble for the world oil market, which depends on five nations around the volatile Persian Gulf for nearly one-fourth of its daily supply.

The latest burst of violence in the Mideast has given the oil market another case of the twitches. No doubt, it also pulled attention away from another source of oil market troubles nearly 8,000 miles away.

Mexico is the world’s No. 5 oil producer and the second-largest foreign supplier of oil to the U.S. Mexico’s largest oilfield is not producing as much as it used to. Production at Cantarell, a huge oilfield second only to Saudi Arabia’s mammoth Ghawar field in size, peaked in 2004 and has fallen 7 percent since 2006 began, according to a recent report in the Los Angeles Times.

No one knows how fast Cantarell will slide down the back side of the oil production bell curve. The Times quoted an energy consultant, formerly with Mexico’s state oil monopoly Pemex, who predicted that the fall will be hard and fast.

Slow or fast, in a world where demand is rising, Cantarell’s falling production is a prescription for more twitchiness in the oil market. That usually leads to higher prices, more insecurity of supply, and a greater tendency in Congress to grasp for half-baked quick fixes designed to get incumbents through the next election.

Mexico could conceivably replace Cantarell by prospecting for oil deeper offshore in the Gulf of Mexico. But that takes money, and any Mexican politician who advocates opening Mexico’s oil sector to foreign capital would be hooted abruptly off that country’s political stage.

Barriers to capital investment, however, are a symptom. The root of the oil market problem is that untapped reservoirs of cheap, abundant oil are harder to come by. The big tunas have already been fished out of the world oil pond. Now, energy producers are chasing deeper swimming, more elusive minnows with costlier gear.

When supplies of a vital commodity are tight and showing signs of falling, it makes sense to buy some time by stretching those supplies. But Congress, especially the House, is still unwilling to even discuss measures to use oil more efficiently. Before passing a bill to throw open U.S. coastal waters to oil drilling, the House Rules Committee refused to permit debate over an amendment to raise motor vehicle fuel economy standards.

Congressman Sherwood Boehlert (R-NY), the retiring chairman of the House Science Committee and the sponsor of the amendment, pointedly told the House that “drilling today just depletes oil we may need later. Conserving now means saving more oil year after year after year.”

Unlike Cantarell, the conservation oilfield will never run out. So far, Congress hasn’t noticed that fact, but time is running out for lawmakers to open their eyes.