Petrol Power: Oil's Hold on Latin America

Article excerpt

Oil, former Venezuelan oil minister Juan Pablo Perez Alfonzo famously noted, is "the devil's excrement." Ironically, his own country has ignored this prophetic warning most of all. In Venezuela and many other Latin American countries, huge nationalized petroleum companies have firmly entrenched themselves as the means to national wealth and power even though corruption, inefficiency, and innovative stagnation often characterize such industries. Finding a way to reshape their industries in order to reap the benefits of oil resources in an efficient manner poses a significant challenge for these countries, especially because sudden abandonment of nationalized industry often fails politically in the face of popular resistance to international capitalism. However, a middle path exists: Latin-American petro-states can avoid the problems of petroleum politicization by embracing economically-focused, state-owned multinationals. If Latin America gradually shifts from a political focus to an economic focus, it may not need to throw the baby out with the ideological bathwater.

Energy nationalization, which stems largely from the strong tradition of Latin American populism, often provides a sense of national identity: to this day Mexicans celebrate their country's 1938 petroleum nationalization. The idea that a nation is rich, fertile, or otherwise uniquely endowed with petroleum stirs a "resource nationalism" that, say, wheat production simply cannot muster. Free-market states frequently criticize such energy nationalization as undermining the benefits of private enterprise. Yet integration of a somewhat competitive, quasi-private system can nudge these national energy giants toward the advantages of the free market more effectively than rapid liberalization.

Consider Brazil's Petroleo Brasileiro (Petrobras). Brazil has been a net exporter of the resource for the last two years, but fifty years ago the country produced only three percent of its oil. Its consistent success contrasts with other, far less stable state-run oil companies. Petrobras is weathering the global financial crisis and consequent slump in world oil demand far better than many of its counterparts, having secured US$1 billion in loans in December 2008 to develop the giant off-shore Tupi oil field, which would remain profitable to recover as long as oil prices stay in the US$50 per barrel range. While virtually every other state-owned oil company faces declining profit forecasts, losses in credit access, and shrinking investment, Petrobras is growing wildly. It is now considering new natural gas fields as well as projects that would increase Brazil's domestic production by one million barrels of oil per day by 2015.

Though Brazil does have certain natural resource advantages, its success is largely due to smart policy. …