BALTIMORE, MD-Petróleos Mexicanos (PEMEX), Mexico's state-owned oil company, is the world's fourth largest oil producer. But because of refining constraints and declining production from Cantarell, PEMEX is now unable to keep up with Mexico's growing gasoline demand. This will force the soccer-loving country to continue increasing gasoline imports. and may spell trouble for the U.S.

There's no denying it . . . Oil is Mexico's bread and butter, accounting nearly 40% of the government's income. Last year PEMEX reported annual revenue of 940 billion Mexican pesos-about 85 billion in U.S. dollars.

Helped by the rising price of crude over the past few years, last year's revenue represented a 16% increase over 2004 and an 82.7% increase since 2002.

A further increase in revenue is expected for this year. Total sales from the first nine months of 2006 have increased 10% over the first nine months of 2005, prompting the fastest economic growth seen in Mexico since 2000.

In 2005 Mexico's GDP stood at $768 billion, the fifth largest among emerging markets, after China, South Korea, Brazil and India.

But if there's one thing a developing economy needs, its energy-especially for transportation. So it's no surprise that since 2000, Mexico's gasoline demand has been growing at a steady average rate of about 5% per year.

Gasoline demand is expected to continue to grow over the next ten years as well. Mexican gasoline demand is forecasted to grow an average annual rate of 3.8% a year from 712,000 barrels per day (bbls/d) to 992,000 bbls/d by 2015.

But there's one big problem.

This demand will rise faster than PEMEX's refining capacity. The government knows this and will be forced to increase gasoline imports. Fact is, Mexico has already been increasing gasoline imports over the past few years. Since 2000, Mexico's gasoline imports have been increasing at an annual rate of 8% as demand from motorists rises. With gasoline demand projected to rise by nearly 40% in under a decade, the Mexican government may be forced to increase their imports accordingly.

This has prompted PEMEX to commit to spending $13 billion in the next seven years to expand production of auto fuels. PEMEX Refinacion says it will build one refinery and add a coker unit, which turns fuel oil into gasoline and diesel, to four plants by 2013. This is in addition to the $18 million PEMEX says it will spend each year for new exploration at a time when production is dropping rapidly from its number one oil field Cantarell, another problem for PEMEX.

Luis Ramírez Corzo, PEMEX's director of exploration and production, recently stated that the company expects production at its Cantarell oil field to decline by an average of 14% a year between 2007 and 2015. Speaking to members of the Senate Energy Committee, Corzo said the average annual decline is equivalent to about 150,000 bbls/d.

The offshore Cantarell, Mexico's largest source of crude oil, began declining in 2005 from a record 2.13 million barrels a day in 2004. Corzo said output at Cantarell is expected to average 1.8 million barrels daily this year.

All this may spell bad news for the U.S.

PEMEX currently produces about 3.2 million barrels of crude per day (MMbbls/d), exporting about 1.7 million barrels daily and is our third-largest oil supplier, with more than 80% of exports going to the U.S.

But with Cantrell in irreversible decline and the growing Mexican economy demanding more and more oil and refined gasoline each year, we will not be able to depend as heavily on Mexican crude as we have in the past.

This is just one of the factors that we believe will continue to have a positive effect on oil prices in the coming years. Positive, that is, for investors who know where to place their bets.