CH 13: Oil Rents and Political Power in Latin America

By Sidney Weintraub

Handbook of Oil Politics

LT Kevin DeCeoursty

Sidney Weintraub

Following his service in WWII, Dr. Weintraub’s distinguished career included 25 years as a Foreign Service Officer and U.S. Deputy Assistant Secretary of State for International Finance and Development; 18 years as a professor of economics and public policy at the University of Texas at Austin, and 17 years at CSIS in Washington.  

His work on U.S.-Mexican relations helped to lay the intellectual foundations for NAFTA.

Geographic Reference

Thesis

Latin American energy policy is characterized by short-term decisions meant to increase political support neglecting the benefits of long-term and efficient development of fuel reserves.

Free market policies are transforming into nationalistic policies characterized by increased state intervention.

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Research Design

Case studies by country: Individual shortcomings, risks of stagnation, and ways forward.

Mexico

Venezuela

Bolivia

Brazil

Argentina

Colombia5

Mexico

• Oil sector nationalized 1938 under Petroleos Mexicanos (PEMEX) financing 40% of federal budget

• Unable to invest oil revenues in production development• Declining output of Cantarell oil fields• Inability to tap new sources of oil and natural gas deeper in

the Gulf • Exploratory assistance from IOCs unlikely

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Mexico

• Oil exports steadily declining during past decade

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• Natural gas imports on the rise

Venezuela

• Oil sector nationalized in 1976 under Petroleos de Venezuela, S.A (PdVSA) financing 50% of federal budget

• Vertical nationalization of oil service companies increase government influence in price control and employment.

• Reduced investment and development with revenues funding social and political agendas.

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Venezuela

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• Oil exports have steadily declined over past decade • With reduced US consumption, Venezuela looks to china

for new markets to sell the nearly 100 billion barrels of proven reserves.

Bolivia

• Through a partnership with Brazilian IOC Petrobras, Bolivia was to become a major regional supplier of natural gas

• Historic animosity between Bolivia and Chile restricted gas exports and incited political and national divisions

• Gas fields effectively nationalized in 2006 in an attempt to capitalize on increasing gas revenues.

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Bolivia

• Declining gas production, rising domestic demand, and declining exports to regional nations.

• Short-term political gains at the expense of long-term benefits.

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Brazil

• Petrobras: an international oil company found major oil and gas discoveries in 2007 allowing increased oil production.

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Brazil

• Sound policies include the establishment of a sovereign wealth fund to direct revenues from new oil fields to poverty alleviation and infrastructure.

• However, with increased spending and inflation nationalization may become more attractive in the future.

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Argentina

• Former state gas company Yacimientos Petroliferos del Estado (YPF) privatized in 1993

• The Argentine economic collapse of 2002 led to government directed price manipulation effectively freezing domestic gas prices.

• Low prices created equally low investment followed by demand outpacing supply

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Argentina

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Domestic political concerns overshadowed long-term strategy Unsustainable domestic gas subsidies force the government to use general funds to import natural gas

Colombia

• Increased production and exports• Efforts to make foreign investments more attractive

(100% ownership and longer exploration licenses)• Able to develop longer-term revenue stream capable of

mitigating “Dutch Disease”

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Conclusion

• Most of Latin America has sacrificed the long-term development of sustainable oil and natural gas resources for short-term political and financial gains.

• Economic inefficiency and manipulation of market forces are not uncommon, but the negative effects are much more profound in the most vulnerable countries in the Americas

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Recent Developments

• In 2013 Mexico opened its oil and natural gas markets to foreign direct investment, effectively ending the 75-year-old monopoly of state-owned (Pemex). Allowing direct foreign investment in Mexico’s oil and natural gas sector.

• After Chavez’s death in 2013, President Maduro continued Chavez’s policies. Venezuela is attempting to increase investment to offset production declines.

• Bolivia is attempting to diversify its export markets by exploring the possibility of sending their natural gas into both Peru and Uruguay; landlocked Bolivia would be able to gain access to ports on both sides of South America and reach other export markets.

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Recent Developments

• Petrobras is under investigation in Brazil and in the United States for bribery and money laundering. The multi-billion-dollar corruption scandal escalated further with allegations of government corruption resulting in losses of more than $8 billion, multiple arrests, and the resignation of the CEO, Maria das Graças Foster

• To incentivize foreign investment and boost domestic energy supplies, Argentina increased the frequency of offshore licensing rounds, allows for longer exploitation periods, and offers tax exemptions to companies that invest more than $250 million over a three-year period, and recently announced a reduction to oil exports tariffs.

ARGENTINA’S NEW HYDROCARBONS REFORM, PUBLISHED ON OCTOBER 31, 2014, PROVIDES INVESTORS 19

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Questions?