Energy and oil expert Byron King says this fall seems less severe when put in a longer-term perspective; crude oil prices are still up around $20 from this time last year.

Byron says a terrible outlook for the US dollar and dwindling supply will ensure oil remains on a long-term uptrend…

This from The Daily Reckoning:

Despite the lack of good news, for the past two months, the dollar has been strengthening. The euro, in turn, has been weakening as Germany and France have slid into recession. Pretty much in tandem with the rising dollar, the prices for oil and natural gas have been falling. And prices for precious metals have also been declining. It’s devastating the stocks in the Outstanding Investments portfolio.

And what’s going on with the price of oil? The other day, someone sent me an e-mail asking about the “plunge in oil prices.” Plunge? Not quite. Oil has not plunged. Or at least it depends on your time frame.

This time last year – September 2007 – a barrel of oil cost about $80, and rising. I remember being in Houston in October 2007 – sitting about ten feet from T. Boone Pickens and his wife – when oil crossed the $90 mark for the first time. Pickens commented, “We’ll see $100 oil before we ever see $80 again.”

T. Boone Pickens was right.

OK, I know what people are talking about. Back in the spring and summer, oil ran up in price. Oil crossed $100 early this year and kept rising. By July of this year, oil traded for over $147 per barrel. At the time, I said that oil was “rising too far, too fast.” I said that a lot of things in this world stop working when oil gets to about $130 per barrel. And I also said – on Fox Business News one early morning in June – “Oil OUGHT to pull back to around $100 to $110 a barrel.”

In the past two months, the price of oil has fallen by $50 or so. But that’s after more than doubling in the past year. So the recent price retreat is not a plunge. It’s just a correction within a long trend of rising prices for energy.

Meanwhile, almost all of the world’s largest oil fields were discovered over 30 years ago and have been lifting crude oil for 30, 40 or more years. So crude oil output from many of the world’s oil fields is either flat (such as in Saudi Arabia) or falling (such as in Mexico).

Even Russian oil output is dropping this year. No less an authority than the head of Gazprom recently stated that oil should sell for $250 or more per barrel.

Closer to home, let’s take a quick look at Mexico. Crude output from Mexico’s Cantarell oil field – the third largest in the world – is falling at its fastest pace in 12 years. For the past two decades, Petroleos Mexicanos (Pemex) has badly underinvested in field upgrades and new exploration. So Cantarell oil output has fallen 34% within the past year.

Indeed, Mexico may cease to be an oil exporter as early as 2010 and, in all likelihood, no later than 2012. In all candor, even the “lack of investment” argument holds a large element of spin. It may well be that no amount of new investment can reverse Mexico’s oil output decline.

Along these lines, I surely do not envy the next U.S. president. One of these days, the morning National Intelligence Brief will begin, “Mr. President, we have some really bad news about Mexico’s oil exports to the U.S. Pemex told us that within the next two months, it just can’t deliver the oil that we’re expecting. And none of the other oil suppliers in the world can begin to make up the difference.”

Yet in the face of all this, the market is currently selling off oil and other energy players. 

So how do we deal with this? I hate to see what’s happening to the Outstanding Investments portfolio. It’s painful to watch such great companies decline in value. But I also have to keep my eyes on the future.

And what does the future hold? The dollar will weaken, what with all the new credit being created to bail out banks, and probably the automakers, and everybody else with a hat in their hand, it seems. And the energy and resource plays are going to stage a comeback. Of that I am convinced.

Source: Buffalo Jumps

Pemex pumps out more oil each year than Exxon Mobil. It pays for 40% of Mexico’s federal spending. And thanks to lack of investment, high taxes, corruption, anti-competition laws, Pemex is headed for collapse.

The bottom line, says Justice Litle in Taipan Daily, is that Mexico’s oil fields are running dry.

“Take the Cantarell field, for example. Cantarell is Mexico’s biggest field. In fact, it’s the second-largest oil field on the planet, behind only Ghawar in Saudi Arabia. In 2005, it came to light that Cantarell production had declined rapidly. ‘Fallen off a cliff’ is how some might put it, in terms of the speed and suddenness of the drop.

“If Cantarell production spirals downward into collapse, then Pemex — and, by extension, the entire Mexican economy — will be.”

To find out why the Mexican crisis could mean $200 oil becoming a reality read on here.

They sang the national anthem and raised their fists in victory. Senator Carlos Navarrete, leftist leader of the Mexican senate, was especially joyful. “We triumphed! We triumphed!”he said.

What the victors did not realize — or refused to recognize — is that their “triumph”merely took Mexico one step closer to the brink, to a deep, dark chasm into which the entire economy could fall…

Monday was Cinco de Mayo, the “Fifth of May,” so it’s fitting to touch on Mexico this week. Many believe Cinco de Mayo is to Mexico as July 4th is to the United States, but that isn’t quite true. It’s actually a regional holiday for the state of Puebla. (Mexican independence day falls in September.)

In other news, crude oil hit new record highs above $120 a barrel this week. Arjun Murti, the Goldman Sachs analyst who first called for a $105 oil “super-spike” three years ago, now sees the possibility of $200 crude in the next 12-24 months.

You might not see the connection between Mexico and the price of crude at first glance. But believe me, the connection is there — and it’s frightening.

Let me explain…

Bigger Than Exxon

Though not a member of OPEC, Mexico is the seventh-largest oil producer in the world. Petroleos Mexicanos, or “Pemex,” is the country’s state-owned oil company. Pemex pumps out more oil each year than Exxon.

Needless to say, oil is a key driver for the Mexican economy. The cash flow from Pemex alone pays for 40% of Mexico’s federal spending.

Imagine if the U.S. government drew nearly half its funding from the revenues of just one company. That would be one heck of an important company. You would think the powers that be would do everything in their power to keep the cash flowing in.

You would think… and yet, Mexico’s oil giant is headed for collapse.

According to Bloomberg, Pemex is plagued by “too little investment, high taxes, laws that forbid competition, corruption, and corroding and exploding pipelines.” That’s just for starters.

A Budding Crisis

It’s not as if the Pemex crisis is new. Observers have been sounding the alarm with ever-heightening concern for at least the past decade. In the past few years, though, things have taken a serious turn for the worse. The company’s 110,000 union workers are poorly trained and hard to control. Fatal accidents are increasing.

Worse still, Mexico’s oil fields are running dry.

Take the Cantarell field, for example. Cantarell is Mexico’s biggest field. In fact, it’s the second-largest oil field on the planet, behind only Ghawar in Saudi Arabia. In 2005, it came to light that Cantarell production had declined rapidly. “Fallen off a cliff” is how some might put it, in terms of the speed and suddenness of the drop.

If Cantarell production spirals downward into collapse, then Pemex — and, by extension, the entire Mexican economy — will be in deep, deep trouble. Mexico’s finances have been boosted in recent years by the sky-high price of crude, and those extra dollars have hidden Pemex’s behind-the-scenes problems. But fewer barrels from the ground means fewer dollars in the bank. Eventually the dropoff becomes too big — and too painful — to ignore.

Mexico’s Energy Minister predicts that, without new production, the country could be forced to import light crude for gasoline by 2011. (Most of Mexico’s oil is of the heavy, sour variety.) By the year 2016, Mexican oil exports could plummet from 1.67 million barrels per day, last year’s levels, to a shockingly low 289,000 barrels per day. That’s quite a dropoff.

Think how much the world’s oil thirst has grown these past eight years. Now think how much it will grow in the next eight years. Now consider how tight the supply-demand situation has already become — and imagine pulling another 1.4 million barrels or so off the market.

Too Deep to Contemplate

The funny thing is, Mexico has more oil that hasn’t been tapped yet — maybe a lot more.

Bloomberg again has the details: “The Mexican Energy Ministry estimates 30 billion barrels of oil and gas are sitting below deep water on the Mexican side of the Gulf of Mexico. Yet it’s unclear whether Pemex, which hasn’t been permitted to form partnerships with foreign oil companies, has the technology, money or competence to drill successfully.”

The problem comes down to technology and experience. To conquer the deep water and drill for oil 10,000 feet down, you need a heaping helping of both. Pemex has neither. The company’s engineers are not savvy enough, its technology not nearly cutting-edge enough, to handle the challenge of deep-water drilling in the Gulf.

This is where politics comes in.

Almost all Pemex profit — and as much as 60% of sales revenues — goes straight to the government. At the end of the day, the company is little more than a cash cow for the state. And because the Mexican presidency can only be held for a single six-year term, the holder of that office typically cares little about long-term planning. The focus is on spending for the here and now instead.

The nature of the beast explains why Pemex is poorly outfitted and poorly run. Political promises are expensive and Pemex cash is there for the spending; only scraps are left over for upgrades and maintenance. Can you imagine running a company whose masters have no regard for the future? I can’t. Perhaps that’s why Pemex has had four different CEOs and five chairmen in the past eight years. Most of them threw up their hands and quit in disgust.

[Perhaps President Chavez could be tempted out of his chaos-causing rule in Caracas with the offer of a rich and perk-filled oil-analyst’s job at Goldman Sachs Group Inc. (GS)].

My colleague – Money Morning Investment Director Keith Fitzgerald – agrees with Chavez that oil prices are headed much higher: In fact, since back in December, when crude oil was trading at $90, Fitz-Gerald has been predicting that petroleum prices would reach $187 a barrel. And there’s growing support for his view: In mid-March, Goldman Sachs forecast oil prices of $175 within two years while just yesterday (Tuesday), noted MSNMoneycentral columnist James Jubak predicted that oil would reach $180 a barrel in the next few years.

What’s “Fueling” the Oil Price Rocket?

Crude oil rose to a record $119.90 a barrel on the New York Mercantile Exchange yesterday, as the greenback dropped to an all-time low against the European euro. Crude oil is up 24% so far this year, and 88% from this time last year, Bloomberg News reported.
With this unrelenting march, it’s no wonder that industry observers continue to roll out ever-higher target prices for the “black gold.”
If we’re only considering economic factors, the steep crude prices now being predicted would be unlikely to stick for any protracted period; there are huge new oil sources of oil that become economically profitable once oil rises above $100 per barrel. The Orinoco tar sands in Venezuela and the Athabasca tar sands in Canada – each of which contains larger oil reserves than the entire Middle East are viable even at $50 per barrel (Orinoco holds an estimated 1.8 trillion barrels and Athabasca 1.7 trillion barrels, versus a current Middle East estimate of 1.6 trillion barrels).

Then there’s Colorado oil shale – also containing at least 1.5 trillion barrels of reserves – that becomes economically viable at about $100.

The bottom line: If oil prices stayed at $180 to $200 per barrel for more than a year or two, huge new oil supplies would come on line, causing crude prices to plummet and tipping the market decisively back towards consumers. The environmental cost of getting really large quantities of oil out of Athabasca and Colorado would be immense, particularly if we attempted to supply the needs of the entire U.S. market from these sources, but at $180 per barrel, I’m confident that the economic necessity would probably trump the environmental problems.

As we said, however, these scenarios consider only economic factors. And as we’ll see, there are two additional factors that make this a much-less-straightforward analysis, meaning oil prices could linger at significantly higher prices for a much-longer period than economics alone would justify.

I’ve labeled these two “wild card” factors as “politics and a paradigm shift.” Let’s look at each one.

First, political factors are increasingly restricting the areas that can be explored for oil. In fact, there are a number of places on earth where large reserves are known to exist, but political obstacles make it impossible to drill for—and remove—the crude.

So there it stays, heavily dampening an increase in production that would otherwise be taking place.

Second, world economic growth has been exceptionally rapid, and two huge population centers, India and China, have simultaneously been introduced to the joys of the automobile culture. And that’s created a major global paradigm shift that promises to shift the auto center of the world from Detroit to Shanghai, while simultaneously causing worldwide oil consumption to soar.

Now that we understand the demand side of the equation, let’s consider the outlook for supply.

Foreign Intervention

Countries that allow foreign oil-sector participation and avoid punitive taxation can reap two distinct benefits. First, production from existing fields is increased by greater efficiency. Second, modern exploration techniques are brought to bear, often resulting in new reserve finds in areas that have been closed to international exploration for decades.

For instance, it is especially noteworthy that Saudi production peaked in 2004, and that Saudi oil reserve figures are in doubt; indeed, most Saudi oil reserves derive from fields that were discovered in the 1970s, if not before.

To see how production may stagnate without the benefit of such outside participation, just take a look at Russia.

After 2000, Russia was the principal source of new oil outside the Middle East. Since 2003, however, the most efficient Russian oil company – Yukos NK OAO – has been dismembered, contracts with foreign oil companies such as Royal Dutch Shell PLC (RDS.A and RDS.B) and BP PLC (BP) have been forcibly renegotiated, and Russia has imposed an 80% tax on oil revenue above $27 per barrel.

The result of these heavy-handed machinations has been pretty much what you’d expect: We recently learned that Russian oil production declined by 1% in the first quarter of 2008, following several years of rapid growth. An oil industry with capitalism, foreign partners and modern technology has given way to autarky and state control.

When it comes to foreign oil companies, other companies are adopting a game plan that’s very similar to that of Russia. Mexico bars foreign participation in oil exploration, and expropriates almost all the net revenue of its oil monopoly Petroleos Mexicanos, more commonly referred to as Pemex. Consequently, Mexican oil production is undergoing a steep decline: It is currently about 12% below its 2006 average, according to the International Energy Agency.

Mexican President Felipe Calderon is attempting to change that, by allowing Mexico to sign joint-venture agreements with foreign energy companies (the first such agreement under discussion is not with a hated “Yanqui,” but is instead with Brazil’s Petroleo Brasilero SA (PBR), usually referred to as Petrobras – itself a state-controlled enterprise, albeit one that’s much-more open to modern exploration techniques). However, even without proposing the politically impossible privatization of Pemex, Calderon’s attempted legislation is running into huge political opposition. 

Other examples abound. Venezuela recently seized majority control of foreign owned oil concessions, so even with the world’s largest oil reserves in the Orinoco tar sands its production has declined by about 6% since 2006. Nigeria taxes foreign oil companies at 98%, so its production has declined 10% since 2006.

There are a few counterexamples. Where the oil industry is open, new reserves are found and production increases. Brazil’s Petrobras participates freely with foreign companies, and has discovered several large offshore fields recently. Iraq’s oilfields were opened to foreign participation after 2003, and Iraq’s estimated oil reserves have since doubled to 200 billion barrels, ranking it second behind only Saudi Arabia as having the largest crude-oil reserves in the entire Middle East.

Globally, oil production from existing fields has declined 7.7% annually since 2000, with British and Norwegian offshore fields showing a particularly sharp decline. That means that large new oil discoveries are required simply to keep pace with demand and to halt oil prices from spiraling up toward infinity. Allowing international participation in oil exploration and production is essential to this process, but the list of countries in which such participation is allowed has declined and appears to be diminishing further.

Crude retreated after the contract hit a record high of $115.54 a barrel earlier in the day, as traders continued digesting Wednesday’s surprising inventory decline.

The unexpected fall “is particularly impressive,” wrote John Kilduff, of MF Global. “A weaker trending dollar continues to be a key impetus behind the rally in crude oil and the greenback shows no definitive signs of bottoming yet.”

And Petroleos Mexicanos, the state-owned oil company whose proved reserves have fallen by more than half since 1999, set a goal of adding 6.3 billion barrels of crude equivalent to its reserves in the next four years.

The price at the pump also hit a record high, of $3.386 a gallon. That was a gain of 1.3% on the day and 10 cents ahead of the month-ago price of $3.285, according to the AAA Daily Fuel Gauge Report.

Supply worries drove the market. In addition to the weekend’s troubling news out of Nigeria was added news that bad weather has forced further export terminal closings in Mexico. Petroleos Mexicanos, the third-largest U.S. supplier of crude, said that 5 terminals are now closed.

Everyone is awaiting the Energy Information Administration’s inventory report, due today. After last week’s surprisingly large decline, analysts are projecting a 1.5 million barrel build this week. Another surprise could have a major effect on prices.