(Bloomberg) – From Saudi Arabia to West Texas, drillers are pumping more oil to cash in on a dizzying price spike. But an area with a fifth of the world’s crude oil reserves is virtually missed.
Most read from Bloomberg
Across Latin America, the rally in $100 crude was quelled by nationalist policies that tightened government control over the energy sector and eliminated foreign investors who were helped boost production. Output from Brazil and Guyana is increasing, but across the region production has fallen so much that it is now barely meeting the demand there. Mexico and Argentina import more crude oil and natural gas than they export, a reversal from the last oil boom a decade ago.
Reliance on expensive fuel imports is putting the leaders of Latin American oil-producing nations in a difficult political position. Facing backlash from cash-strapped motorists, Brazilian President Jair Bolsonaro is sticking to his main rival ahead of October’s elections. Ecuador’s president was nearly impeached following protests over the election. fuel prices and inflation. Mexico is spending billions of dollars to subsidize gasoline prices.
All of this means that the world cannot count on Latin America to increase oil and natural gas production as Russia’s invasion of Ukraine reduces global supply. While manufacturers in the US and Middle East are ramping up production, that’s not enough to stem the rampant price gains that threaten to trigger fuel allocation and push economies into recession.
It is in stark contrast to the previous commodity boom in Latin America. In the 2000s, leaders like Hugo Chavez of Venezuela used oil and gas cash to bolster their popularity at home and expand their influence in the region. But those excess revenues are only possible because foreign investments have boosted production. When Chavez nationalized the oil industry, large projects were mismanaged and money dried up.
“The oil industries are victims of thriving resource nationalism,” said Francisco Monaldi, a lecturer in energy economics at Rice University’s Baker Institute of Public Policy and an expert on Latin America. operating in the era of the super wheel. “Now they don’t have the ability to do what Chavez did in 2003 and 2004, to massively increase spending.”
Of course, the trade balance would have been even worse for Latin America’s state-owned oil exporters if crude prices hadn’t spiked this year. Brazil’s Petroleo Brasiliero SA, Ecuador’s Ecopetrol SA and even Mexico’s heavily indebted Petroleos Mexicanos are reporting sky-high profits and strong dividends. But it will take time to collect higher taxes from crude exports into government coffers, and only an extended super car ride can provide relief to the strained region.
The broader economic benefits of the oil protest have not been enough to derail anti-establishment waves across Latin America. Colombia recently elected an outsider to the presidency who plans to ban jailbreaking. In Brazil, Luiz Inacio Lula da Silva, who presided over economic expansion during his first administration largely thanks to commodities, is the favorite to replace Bolsonaro in the upcoming election. Mexican President Andres Manuel Lopez Obrador has sought to strengthen state-owned companies by removing rules and regulations that promote a more competitive market.
In Monaldi’s view, Latin America’s oil fields would pump 20 million barrels a day, more than double current levels, if producers there had all the benefits that Texas driller-friendly for businesses: easy access to capital, low taxes and light regulation. Instead, interventionist policies – such as seizing shares in oil fields from foreign partners, raising taxes and not exploiting areas ripe for drilling – are returning home. potential,” Monaldi said in an interview.
The biggest gainer this year in the region is the Guyana offshore drilling newcomer. But it won’t rise again until 2023, when Exxon Mobil Corp’s next floating production tanker. Venezuela’s oil production has rebounded under a more relaxed enforcement of US sanctions in 2021, but it’s unclear if the country will be able to expand or even maintain current levels – output still is the shadow of five years ago. Profits from Brazil, whose vast offshore resources remain untapped, are modest.
Even a spike in Argentina’s oil production to its highest level in a decade is unlikely to bring any relief to the markets, as the country is only a mid-sized producer. Infrastructure constraints and domestic price controls limit the pace of its expansion despite world-class shale deposits.
In total, the International Energy Agency only expects an additional 400,000 bpd from Latin America this year, a third of the growth expected in the US.
The region’s main manufacturing success story this century is Brazil, but even output would double its current levels if the first Lula administration hadn’t stopped growing for half a decade to rewrite the oil laws. , Monaldi and other analysts said.
Read more: Lula’s Petrobras will look to transform energy, expand refining operations
If Lula wins as expected, the main concern is that the government will slow down the development of any major discoveries to increase income levels, said Andre Fagundes, head of energy consulting in Brazil. gorvernment’s. Petrobras is currently preparing to drill in an unexplored offshore area near the equator.
Fagundes said that if Brazil makes major new discoveries like recent successes in Guyana and Suriname, the Lula government could slow the tax hike.
“This could be a topic they consider for future licensing rounds,” he said.
(Updates with Mexican background in eighth paragraph. An earlier version removed incorrect reference to Evo Morales in fifth paragraph)
Most read from Bloomberg Businessweek
© 2022 Bloomberg LP