Oil boom leveling off in region with one-fifth of world reserves

From Saudi Arabia to western Texas, drillers are taking advantage of rising prices to pump more oil. But in a region that accounts for one-fifth of the world’s oil reserves, most have been lost.

Across Latin America, the $100 (€100) rise in crude oil has been slowed by nationalist policies that have increased government control over the energy industry and sidelined foreign investors who have helped boost production.

Although production from Brazil and Guyana has increased, production across the region has fallen significantly and is now barely meeting demand there. Mexico and Argentina are importing more oil and natural gas than they export, reversing the last oil boom a decade ago.

Dependence on expensive fuel imports has put the leaders of Latin America’s oil-producing countries squarely at a political crossroads.

Brazil’s President Jair Bolsonaro faces backlash from cash-strapped motorists ahead of October’s elections. Ecuador’s president was about to be impeached over protests over fuel prices and inflation. Mexico spends billions to subsidize gasoline.

All this means that Latin America cannot expect to produce more oil and gas as Russia’s invasion of Ukraine strains global supplies.

Producers in the United States and the Middle East are increasing output, but not enough to stop rampant price increases that could trigger fuel rationing and plunge economies into recession.

different from previous booms

This is in stark contrast to how previous commodity booms played out in Latin America.

In the 2000s, leaders like Venezuela’s Hugo Chavez happened to use oil and gas cash to increase their popularity in the country and expand their influence in the region.

But these huge revenues were only possible because foreign investment boosted production. When Chavez nationalized the oil industry, major projects were mismanaged and funding dried up.

Former Venezuelan President Hugo Chavez, who died in 2013

David Fernandes/ LT Archive

“The oil industry fell victim to the resource nationalism that prevailed during the supercycle,” said Francisco Monardi, a Latin American expert and lecturer in energy economics at the Baker Institute for Public Policy at Rice University. So they don’t have the ability to build massive spending like Chavez did in 2003 and 2004.”

Of course, had it not been for this year’s surge in oil prices, the trade balance of Latin America’s state-owned oil exporters would have been even worse. Brazil’s Petroleo Brasiliero SA, Ecuador’s Ecopetrol SA, and even Mexico’s heavily indebted Petroleos Mexicanos report impressive earnings and pay solid dividends.

However, it will take time for increased tax revenues from oil exports to fund governments, and only a prolonged supercycle will finally bring relief to the strained region.

The wide-ranging economic benefits of high oil prices were not enough to derail a wave of dissidents across Latin America. Colombia recently elected an outsider as president who plans to ban fracking.

brazilian general election

In Brazil, Luis Inacio Lula da Silva led the economic expansion in his first administration, largely thanks to commodities. He is a leading candidate to replace Bolsonaro in the next election.

Mexican President Andrés Manuel López Obrador has sought to strengthen state-owned enterprises by removing rules and regulations that promote a more competitive market.

In Monardi’s view, Latin American oilfields should allow producers there to enjoy all the benefits enjoyed by business-friendly Texas drillers, such as easy access to capital, low taxes, and light regulation. would produce 20 million barrels per day, more than double current levels.

Instead, interventionist policies are taking hold, such as depriving foreign partners of oilfields, raising taxes, and failing to explore areas ripe for drilling. In an interview, Monardi said, “It’s amazing how serious the risk on the ground is and how it has affected the potential of the industry.

small profit

Offshore drilling newcomer Guyana has seen the biggest price gains in the region this year. However, no further increases will be seen until 2023, when ExxonMobil’s next floating production tanker arrives.

Venezuela’s oil production has rebounded in 2021 as US sanctions eased, but it is unclear if current levels can be increased or even maintained. Profits from Brazil, which has significant offshore resources still underutilized, are modest.

Luis Inacio Lula da Silva is the frontrunner to become Brazil’s next leader

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Argentina is only a medium-sized producer, so even a surge in Argentina’s oil production to a decade high is unlikely to bring relief to the market. Despite world-class shale deposits, infrastructure constraints and domestic price controls limit the rate of expansion.

In total, the International Energy Agency expects only an additional 400,000 barrels per day from Latin America this year, a third of growth expected in the United States.

The region’s main production success this century has been Brazil, but Monardi says production will double today unless Lula’s first government halts development for six months to rewrite oil laws. Another analyst said.

If Lula wins as expected, the main concern is that the government will delay development of the big discovery to boost state support, said André Fagundes, Brazil’s head of energy consulting firm Welligence. Petrobras is now preparing to drill in less explored offshore areas near the equatorial margin.

If Brazil makes important new discoveries, such as its recent successes in Guyana and Suriname, the Lula government may delay development due to higher taxes, Fagundes said.

“This could be one topic we’ll look at for future licensing rounds,” he said.

©2022 Bloomberg LP

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