The oil boom is hitting an area with a fifth of the world’s reserves

(Bloomberg) — From Saudi Arabia to West Texas, drillers are pumping more oil to cash in on a hot price rally. But a region that hosts a fifth of the world’s crude reserves is mostly missing out.

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Across Latin America, the surging $100 crude oil price has been dampened by nationalist policies that have strengthened government control of the energy industry and are crowding out foreign investors who had helped boost production. Production from Brazil and Guyana is increasing, but across the region as a whole, production has fallen so much that it now barely meets demand there. Mexico and Argentina import more crude and natural gas than they export, a reversal from the last oil boom a decade ago.

Reliance on expensive fuel imports puts the leaders of Latin American oil-producing countries in the political crosshairs. Facing a backlash from cash-strapped drivers, Brazilian President Jair Bolsonaro is trailing his main rival ahead of an October election. Ecuador’s president was nearly impeached after protests over fuel prices and inflation. Mexico spends billions to subsidize gasoline.

All of this means the world cannot count on Latin America to increase oil and gas production as Russia’s invasion of Ukraine squeezes global supply. While producers in the US and the Middle East are adding output, it is not enough to stem the rampant price increases that threaten to trigger fuel rationing and tip economies into recession.

It’s a stark contrast to how commodity booms in Latin America preceded it. In the 2000s, leaders like Venezuela’s Hugo Chavez and Ecuador’s Evo Morales used oil and gas windfalls to boost their popularity at home and expand their regional influence. But these outsized revenues were only possible because of foreign investment that increased production. When Chávez and Morales nationalized their oil industries, major projects were mismanaged and money dried up.

“Oil industries have fallen victim to the resource nationalism that prevailed during the supercycle,” said Francisco Monaldi, a lecturer in energy economics at Rice University’s Baker Institute for Public Policy and an expert on Latin America. “Now they don’t have the ability to do what Chavez did in 2003 and 2004, to raise massive spending.”

Of course, trade balances would have been even worse for Latin America’s state oil exporters had crude prices not soared this year. Brazil’s Petroleo Brasiliero SA, Ecuador’s Ecopetrol SA and even Mexico’s over-indebted Petroleos Mexicanos all report spectacular profits and pay strong dividends. But it takes time for higher tax revenues from crude exports to trickle into government coffers, and only a prolonged supercycle would finally bring relief to the strained region.

The broader economic benefits of the oil rally have not been enough to derail an anti-establishment wave across Latin America. Colombia recently elected an outsider to the presidency who plans to ban fracking. In Brazil, Luiz Inacio Lula da Silva, who presided over an economic expansion during his first administration thanks largely to commodities, is the favorite to replace Bolsonaro in the upcoming election.

In Monaldi’s view, Latin American oil fields would pump 20 million barrels a day, more than double current levels, if producers there had all the benefits that drillers in business-friendly Texas enjoy: easy access to capital, low taxes and light regulation. Instead, interventionist policies – such as seizing oil shares from foreign partners, raising taxes and failing to explore areas ripe for drilling – are making a comeback. possibilities,” Monaldi said in an interview.

Small profits

The biggest gainer this year in the region is offshore drilling newcomer Guyana. But it won’t see more increases until 2023, when Exxon Mobil Corp.’s next floating production tanker arrives. Venezuela’s oil production has rebounded due to the easing of US sanctions in 2021, but it is unclear whether it can expand or even maintain current levels – production is still a shadow of what it was just five years ago. Earnings from Brazil, which has significant untapped offshore resources, were modest.

Even a rise in Argentina’s oil output to a decade-high is unlikely to bring relief to markets, as the country is only a medium-sized producer. Infrastructure constraints and domestic price controls limit how quickly it can expand despite world-renowned shale deposits.

Overall, the International Energy Agency expects only an additional 400,000 barrels per day this year from Latin America, one-third of the growth expected in the US.

The region’s main production success story this century has been Brazil, but even there production would have been twice as high as it is today if Lula’s first government had not halted development for half a decade to rewrite the law on oil, Monaldi and other analysts said.

Read more: Lula’s Petrobras would seek energy transition, expand refining

If Lula wins as expected, a key concern is that the government will slow the development of any major discoveries to increase state responsiveness, said Andre Fagundes, who covers Brazil for energy consultancy Welligence. Petrobras is currently preparing to drill in an unexplored offshore area near the equatorial margin.

If Brazil makes major new discoveries, such as recent successes in Guyana and Suriname, a Lula government may slow growth to raise taxes, Fagundes said.

“This may be an issue they look at for future permit rounds,” he said.

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