Latin American countries do not take full advantage of oil price windfalls

Oct 17, 2004 02:00 AM

Flush with cash today, petroleum-rich nations in Latin America have stopped thinking about tomorrow. Windfalls from higher oil prices are enabling nations such as Ecuador, Mexico and Venezuela to mask the mounting urgency for reforms and investments needed in the region's energy sector.
The region -- which produces and exports heavier crude that sells for $ 33 to $ 43 compared to the more than $ 50 a barrel for lighter crude -- is not taking full advantage of this period of higher prices, experts said.

"It's an opportunity that should be used wisely. There is this sort of sense among policymakers in Latin America and elsewhere that oil prices are going to be high for some time. That's a dangerous approach," said Amy Myers Jaffe, associate director of the Rice University Energy Program at the James A. Baker III Institute for Public Policy.
"It's a myth that oil prices will stay like this forever."

Rich in oil resources, the region's politics, volatility and investment shortfalls have meant Latin America hasn't met its potential. Once again, Latin America appears poised to miss a possible opportunity of becoming the oil supplier for the Western Hemisphere, as energy experts predicted it could be.
"Everything looked very promising in the 90s," said Jaffe of Rice University. "In the late 90s people expected by 2010 we would have hemispheric self-sufficiency."

Those expectations went unmet in part because of the lack of reforms and political problems.
"One of the effects that you have when you have high oil prices is you can temporarily solve structural problems," said Ricardo Amorim, head of Latin America research for WestLB in New York City. "Those countries are not investing as much as they should in the future and that could create bottlenecks in the future."

That's already happening in Venezuela where production dropped after last year's strike by workers for the national oil company of Petroleos de Venezuela, or PdVSA. The oil company has yet to restore production to pre-strike levels, but that's being disguised by a 70 % increase in oil prices, during the past year.
In volatile Venezuela, President Hugo Chavez won an August referendum that threatened to oust him from office. Higher priced oil, which accounts for about 80 % of the nation's exports, provided a huge boost to an economy that shrank by 9.2 % last year. This year, economists expect Venezuela's Gross Domestic Product to reach 9.8 % and that helped Chavez win the recall referendum.
"Those oil prices came at a perfect time for Chavez," said Jed Bailey, director of Latin American research at Cambridge Energy Research Associates.

Instead of using the injection of money to upgrade the petroleum industry, the populist president pumped the money into social programs like soup kitchens before the election and economists say he continues to do that.
"If he neglects that upstream investment to transfer funds to social programs, he could be killing the goose that lays the golden egg," said Bailey, of the Cambridge, Massachusetts-based energy advisory firm.

In Mexico, the opposite is happening. President Vicente Fox is paying down the nation's debt, squirreling away some money in an oil stabilization fund and doling out more money to Mexico's 31 states for infrastructure projects. While he's being pressured to spend the extra money on social programs, he's not following in Chavez's footsteps.
"It is not in the benefit of the welfare as a whole to spend the oil revenues," said Alfredo Thorne, senior economist for J.P. Morgan Chase in Mexico City. What is good for the economy is maintaining a good standard of living, Thorne said.

And while Mexico's GDP is expected to reach 3.5 % this year compared to 1.3 % last year, Fox hasn't managed to do something he hoped he could when he took office in 2001 -- make much-needed fiscal and energy reforms. With more than half of his administration behind him Fox is unlikely to reach his goal because there's no political momentum to make the changes, said Jaffe.
Fox's aim was to make the Mexican government less dependent on the volatile oil industry and the state-owned Petroleos Mexicanos, or Pemex. Reforms are also needed to allow private companies to invest in Mexico's oil sector, energy experts have long said. The issue is controversial because Mexicans mix oil with pride, believing petroleum and hydrocarbons are part of their national patrimony.

With prices for Mexican Mayan crude up more than 60 % compared to a year ago, lawmakers are more likely to stave off a constitutional amendment allowing foreign investment in the oil industry until they feel pressured to make the change, said Bailey.
"It seems like you almost need a crisis for change to occur in that sector," said Dana Contratto, a partner in law firm Crowell & Moring in Washington, DC.

Ecuadorian President Lucio Guitierrez faces a similar battle in a nation where reforms are also needed to make the economy less reliant on oil revenues. Oil prices are up about 50 % compared to a year ago, but Gutierrez can't push through a hydrocarbons law allowing private investment in the nation's oil fields.
Gutierrez's administration is paying down the nation's debt with the past year's 50 % increase in Ecuador's petroleum prices, but he's being pressured to spend the extra oil revenues on social programs.

In neighbouring Colombia, guerrillas have hurt the nation's energy sector by blowing up pipelines. Now an oil exporter, the nation could soon become a net importer of oil if significant, new reserves are not discovered soon, according to the Energy Information Administration. While higher oil prices boost dollar exports for nations like Mexico and Venezuela, for other nations the prices cause inflationary concerns.
"If you're a big net exporter, it's good for you. If you're a big net importer it's going to hurt," said Seth Kleinman, market analyst for PFC Energy in Washington, DC.

On the streets of Tegucigalpa, Honduras and Santiago, Chile, higher gasoline prices mean drivers pay more at the pump. The higher oil prices come just as coffee and copper prices, primary commodity exports for Honduras and Chile, respectively, are rebounding.
Even in petroleum exporting Mexico, consumers face inflationary pressures. Because of insufficient refining capacity in Mexico, much of the nation's petroleum is sent to the US Gulf Coast to be refined and then returned to Mexico at international market prices. As a result, motorists in Mexico City pay about $ 2.09 a gallon, despite their country's rich oil reserves.
"The burden of higher oil prices is going to pass on to consumers," said George Baker, president of Mexico Energy Intelligence, an industry newsletter based in Houston.

Source: Houston Chronicle
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