Oil prices soar to $93/barrel; bad weather in Mexico is culprit

On Sunday night, Pemex announced that as a result of the recent accident that damaged one of its oil platforms and left dozens of its workers dead or missing, and in anticipation of another week of stormy weather, it would halt 1/5 of total production until Thursday. The announcement, exacerbated by the continually weakening US dollar and rising tensions between Turkish troops and Kurdish rebels along the border of the oil rich Kurdish region of Iraq, caused oil prices to rise overnight to record highs. Prices are expected to begin to return back to normal levels once Pemex resumes production in the next couple of days.

The oil market "may be only one or two events away from" $100-plus barrel, Daniel Yergin, chairman of Cambridge Energy Research Associates and a leading oil analyst said yesterday: "What we're seeing in the oil market today is rooted more in the cauldrons of geopolitics and the impact of financial markets, expectations and psychology than in supply and demand."

As with the spike in prices in May, the immediate problem is not so much the price of crude as the price of refined products – petrol, diesel, heating oil, plastic feedstocks and the rest – going into the US. With a background of a housing slump and sluggish consumer demand, another squeeze from higher gasoline prices on the pocket books of Americans heightens the possibility of a recession.

Four months ago, it was the shutdown of refineries in the US itself; now it is the Mexican refineries, affected by bad weather, that are the problem. Capacity is tight in any case, with a mis-match between the world's refining capacity (geared towards treating "light" oils) and its production (growing most at the heavy end of the crude spectrum). No new refineries have been built in America since the 1970s. US stocks of oil and gasoline are low by recent standards.

What's sad is that the world's obsession with oil isn't going to disappear until, well, oil does. Even though, as they are in the rest of the world, oil reserves in Mexico are quickly vanishing, people here still consider oil to be the country's only hope for sparking a resurgence in the Mexican economy. In his recent Tax Reform package President Fecal seemed to finally recognize Mexico's need to find new sources of national income to take oil's place. However, he hasn't done anything to raise the 1960's quality standards of Pemex, the state-owned oil company that is going to remain the main bloodline of Mexico for the next several decades. Surely, Fecal is justified in wanting to phase out Mexico's dependency on oil. But if he doesn't present a formula for making a smooth transition to alternative sources, of energy but really of sources of state income, the entire country will suffer as a result.