Lessons from Moscow, Mexico and China

by Dr. Mark Edwards

The fossil fuel used in 1997 consumed 422 years of all plant matter that grew on the entire surface and in all the oceans of the ancient Earth about 400 million years ago. —CBC Archives

While news of the heat in Russia and fierce wild fires around Moscow dominate the news, two significant new reports have been published on Mexican and Chinese oil production that is declining at an “alarming rate.” The demand side of the oil equation has been known for some time but this new data on declining supplies changes the energy matrix.

Higher demand with falling production means higher prices for crude oil in the near future and a better market for alternative fuels. This inversion of demand over supply has been predicted before but this round appears to be real.

Mexico is a critical oil supplier to the United States but its crude oil production decline continues to accelerate. Mexico’s production decline will soon remove about 1.5 million bbls per day out of US imports. Mexico will join the US as a net energy importer in 2015. The Mexican Energy Ministry production statistics are dire.

Mexico Crude Oil Supply

Mexico currently uses around 2 million bbls per day domestically. This production shortfall will seriously undermine the entire Mexican Federal budget and the economy of Mexico – which gets roughly 40% of its revenue from PEMEX oil exports. The production decline will also seriously affect Mexico’s ability to continue subsidizing local gasoline in Mexico. This will create serious trouble ahead for Mexican commerce that relies on cheap fuel to move produce to US markets. It also means expanded opportunities for alternative energy like the alternative drop-in liquid biofuels from algae.

The giant Cantarell, offshore oil field was discovered in 1976—based on a natural oil seep under about 150 feet of water. Now, oil output from Cantarell is declining at an astonishing rate. Meanwhile, the yield from new Mexican oil fields cannot make up for the declines. Mexico has some deepwater oil fields but they have been abandoned because annual hurricanes make drilling and producing on deep ocean oil rigs too risky and dangerous. Current oil and gas technology can only recover about half the pool from deep ocean oil fields, much less than land-based wells.

Mexico is unlikely to rebuild its oil industry in the next decade because there is far too little internal Mexican investment in exploration and new oil development. Mexico has under-funded maintenance capital, the funds necessary just to keep the day-to-day operations and equipment working.

Mexico’s lack of success in discovering and developing new oil resources is surprising. The country has national jurisdiction over a large slice of the oil-rich Gulf of Mexico, which should create substantial wealth in oil. However, the unintended consequence of Mexico’s constitution severely restricts foreign participation in Mexico’s energy development. Mexico followed Saudi Arabia’s model that banned foreign oil companies from exploring for and drilling for oil in Mexico. Mexico’s oil declines may cause legislators to change the protectionist approach to development.

The Global Business Intelligence Research report “Oil and Gas Supply and Demand Outlook in Asia pacific 2020” projects China’s crude oil production to decline at an average annual rate of 3.7% between 2010 and 2020. Despite its production decline, China will produce more than triple the amount of crude oil as the next largest Asian producer, Malaysia, in 2020.

Over the next decade Asia Pacific annual demand is projected to increase for crude oil at 1.5% and 4.3% for natural gas. Natural gas demand is expected to grow at an AAGR of 4.3%, largely driven by demand growth in China and India. The strong growth of oil and gas demand will provide the impetus for huge investments in the midstream and downstream sectors of Asia Pacific in the next decade.

India will emerge as the second largest crude oil consumer in Asia Pacific by 2013. Currently, India is the third largest oil consumer in Asia Pacific after China and Japan. Driven by strong growth in GDP, India is expected to experience the largest oil consumption growth rate in Asia Pacific between 2010 and 2020. Japanese crude oil consumption is expected to decline at an average annual rate of 0.7% in the same period.

Net Zero Oil Exports
These production declines in Mexico and China demonstrate a concern more perilous than peak oil – net zero oil exports. Net zero exports occur when exporting countries decide to use the oil themselves rather than sell it on the open market. As oil reserves shrink, oil exports are likely to decline sharply because they have more value in-country rather than on the world market. Net zero oil exports means there is no oil to buy.

Russia provides a leading example of net zero export for food energy. Russia has already announced that their 20%-30% crop loss in 2010 motivated political leaders to ban food exports—even before the fall harvest. Since the food sector, similar to energy, is tightly interconnected with world markets, food prices will climb. Speculators are already buying up futures and escalating food and feed prices.

Moscow wildfires

Net zero energy export events occurs even earlier in the supply-demand cycle than food. This probably happens because most countries believe their food production is renewable and will bounce back next year.

The problem for fossil fuel consumers occurs because the cash infusion from oil exports in Venezuela, for example, stimulates domestic consumption of government subsidized 19 cent a gallon gasoline. As reserves fall, oil prices rise, bringing in more cash and further increasing domestic consumption, to the detriment of exports.

Geologists Jeffrey Brown and Samuel Foucher built economic models for net exports that show once oil production in an exporting country peaks and begins decline, exports drop precipitously. Due to increased domestic demand, only about 10% of post-peak oil production is exported. Why should a country export crude oil when they can use the oil domestically to create products such as plastics that are worth 5 to 10 times more than crude oil? Their most likely case scenario predicts that the top five oil producers will approach net zero exports around 2031.

Another petroleum engineer, Jean Laherrère, assumed greater Saudi oil reserves and projected net zero exports by 2050. Unfortunately, a decade before net zero exports occur from Saudi Arabia, fossil fuels will be too expensive for industrial food production. The net zero export problem makes finding a food supply free of fossil fuels both mission-critical and urgent for the survival of human societies.

Fossil fuel challenges extend far beyond concerns about supply. They include subsidies, consumption, pollution, health impacts, prices and the supply chain. Each must be significantly reduced to avoid catastrophic outcomes. The best solution; develop a suite of green energy sources that are sustainable and non-polluting and at the same time design ways to significantly reduce energy consumption. Energy savings needs to begin with farmers because, after cars, agriculture consumes the most fossil energy in the U.S., about 18%. Farms are also responsible for about 37% of America’s air pollution and a majority of soil and water pollution.

The only practical food supply that will produce good food after net zero energy exports will be Abundant Agriculture. Algae can produce food, feed and fertilizer for traditional field crops using no or minimal fertile soils, fresh water, fossil fuels, inorganic fertilizers or fossil agricultural chemicals. We need to begin developing food and energy produced based on abundance with inputs that are affordable and will not run out—sunshine, CO2 and wastewater. We need to act now so that our children will have abundance.

The last section adapted from Crash! The Demise of fossil Foods and the Rise of Abundance, Mark Edwards, 2009.