Mexico, Venezuela oil slumps could hit U.S. supply

By Brian Ellsworth and Catherine Bremer - Analysis

CARACAS/MEXICO CITY (Reuters) - Falling oil production in Venezuela and Mexico, Latin America's biggest suppliers of crude to the United States, could deepen U.S. reliance on shipments from the Middle East and Africa.

The outlook comes as a setback to the White House, which is hoping to reduce U.S. oil dependence on unstable regions.

"The best Mexico and Venezuela can hope for right now is to keep their production flat, but the more likely scenario is that we will see a decline," said Fadel Gheit, an analyst with Oppenheimer and Co. "Someone has to fill that gap, whether it is Russia, the Middle East or West Africa."

The two countries currently provide some 25 percent of U.S. oil imports, but analysts say the region will be unlikely to boost exports to meet growing U.S. energy demand.

The self-styled socialist revolution led by Venezuelan President Hugo Chavez, and the strict prohibition on private energy investment in Mexico, have created harsh investment climates that experts believe will crimp future production.

U.S. Department of Energy data shows Venezuela's oil and liquids production remaining steady between 2005 and 2015, with Mexico's production falling 21 percent in the same period.

Total Latin American oil exports could still eke out a 2 percent increase by 2012, on rising production by Brazil, according to the International Energy Agency, but it will not be enough to keep up with rising U.S. consumption.

FALLING OFF THE MAP

Problems in Mexico and Venezuela would extend an existing trend of stagnant energy production in Latin America.

Ecuador's small oil industry produces around 530,000 barrels per day and oil exports to the United States were down 31 percent as of April, as leftist President Rafael Correa tightens terms for foreign oil companies.

Colombia's oil production peaked near 800,000 bpd in 1999, and has slumped to around 520,000 bpd, with exports to the U.S. down more than 50 percent in the first four months of 2007.

Petrobras (PBR.N) of Brazil has steadily boosted domestic production and last year made that country energy self-sufficient, but the booming growth of South America's largest economy could leave it without a significant energy surplus.

"If you look at most long-term forecasts, they do not show Latin America as a major source of growth," said Michelle Billig, an analyst with PIRA Energy in New York.

"This is part of the bigger story keeping prices up. If you look around the world, where can you go for supply growth?"

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