Latín América has vast oil reserves, but one thing could threaten production: socialism

Latín América has vast oil reserves, but one thing could threaten production: socialism


At a time when countries, especially those in the European Union, are scrambling to find affordable energy sources to offset the loss of Russian natural gas and oil, the leftward shift of several Latín American countries will probably reduce the available supply of fossil fuels, exacerbating world shortages.

By AOL – Wayne Stoltenberg and Merrill Matthews

Dec 27, 2022

And that shift will put more pressure on the United States to remain the world’s leading oil and gas producer and export even more of both.

In 2021, the U.S. Energy Information Administration reported that Central and South América produced 7.3 million barrels of crude oil per day. That’s about 9 percent of global production.

It could have been much more. And, in fact, it was – before a few leftist governments came to power in Latin América. But it may also mark a high point, as even more Latin American countries are turning left.

From the mid-1990s to the early 2000s, Venezuela and México were Latin América’s leading oil producers, about 3.5 million barrels per day each. Both counties have national oil companies and have suffered from inefficiency and underinvestment.

But Venezuela’s production has declined 82% from its peak, while México’s has declined 37 %. And it’s not because either country is running out of crude oil. Venezuela is the world’s leader in proven oil reserves with 298 billion barrels. México is 18th with 9.8 billion – not a lot, but enough to keep producing at higher levels for years to come.

What happened? Socialism.

In 1999, Hugo Chávez became president of Venezuela, promising a “Bolivarian Revolution” that emphasized nationalism, a centralized economy, and redistribution of wealth. Two decades later, only poverty and hunger have been widely redistributed.

The Venezuelan economy is largely based on oil. And at one time, it significantly relied on private sector companies to help extract, transport and refine that oil.

In 2002, Chávez began re-nationalizing the country’s oil and gas industry, expropriating assets of foreign companies and precipitating an exodus of both capital and expertise. As a result, oil and gas production began to level off or decline. Chávez successor Nicolás Maduro went even further, precipitating a mass private sector exodus.

With little maintenance capital to deploy and limited remaining knowledgeable human capital to deploy it, the country with the largest proven oil reserves struggles to produce half a million barrels today, about one-seventh of its peak production.

Fortunately, México hasn’t followed in Venezuela’s footsteps — yet. That may be changing.

México removed barriers to attract foreign investment in its energy sector under Presidents Vicente Fox, Felipe Calderon and Enrique Peña Nieto, but any gains are fading under leftist President Andrés Manuel López Obrador.

Lopez Obrador says he wants to see “the people benefit from the nation’s oil resources.” History shows us that when “the people” own something, the government class tends to disproportionally benefit.

Brazil has clearly taken a different path. Brazil’s proven oil reserves stand at 15.3 billion barrels, yet its current oil production far surpasses Venezuela and México. Why? Foreign investment.

While Brazil has a national oil company, Petrobras, many leading international oil companies – including Shell, Exxon, BP and Chevron – may partner with Petrobras.

The superiority of Brazil’s traditional, pro-market energy investment climate, where there was little to fear from expropriation or non-payment, has been the key.

However, that history of a workable public-private partnership may change with the re-election of leftist Luiz Inácio Lula da Silva to the presidency. Will he embrace the longstanding public-private partnership in energy production or follow other leftist Latin American governments in restructuring or scaling back those partnerships?

After Venezuela, México and Brazil come Columbia and Argentina. Neither has been a major oil producer, but Argentina’s willingness to keep voting for socialists and Columbia’s recent embrace of its first leftist president means the best we can hope for is stable or gradually declining production.

Russia is on the prowl. It would love to fill the oil-production expertise gap created by pushing out private sector companies, and many Latin American countries have been, or will be, willing to do just that.

The leftward turn of many Latin American governments is yet another reason why the Biden administration needs to end its war on U.S.-produced fossil fuels. Otherwise, the energy shortages facing Europe will find their way to the states.

Wayne Stoltenberg is the former executive vice president and chief financial officer of Vine Energy Inc., and chairman of the board of the Institute for Policy Innovation, a free-market think tank in Irving. Merrill Matthews is a resident scholar at the institute.

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