An energy giant chained by politics

Moisés Naím / World Energy & Oil

Latin America is an energy giant hobbled by its politics. Its energy reality falls far short of its immense possibilities. This gap has many reasons—punitive regulations, lack of innovation, inadequate infrastructure, weak property rights, corruption and more. Latin America’s geology is great for energy production but its prevailing ideology is far less conducive to the adoption of successful energy policies. Indeed, politics underlies many of the obstacles that limit Latin America’s energy performance. From longstanding resource nationalism to the populism common throughout the region, politics has always shaped the way the Latin American nations explore, produce, consume and, in some cases, export energy.

The extreme case of Venezuela illustrates the point particularly well: the country has one of the largest reserves of oil in the planet but also the lowest ratio of production to reserves among all oil producing countries. Moreover, its oil production continues to decline due to lack of investment, mismanagement and bad policies. Sadly, while extreme, this is not an isolated example. Oil reserves in Latin America represent 20 percent of the world’s total but the region’s aggregate production is a meager six percent of the total.

The gap between the region’s potential and reality also extends to renewables. Through geospatial analyses, IRENA, the International Renewable Energy Agency, has identified many areas in Latin America that show immense promise as a source of wind and solar power. According to IRENA, developing just one percent of these areas would increase installed wind energy capacity by a factor of 16. That Caribbean countries have much to gain from switching from hydrocarbons to wind and solar energy production is obvious. Yet, over a decade of politically motivated oil subsidies from Venezuela have slowed down their efforts to adopt energy policies that are less dependent on politics and more sustainable over the long term. In Brazil, the rigid attachment to old-style import substitution policies have led to deterioration of the operational efficiency of its energy industry. And, like many other countries everywhere, most Latin American nations also have a large and intricate set of consumer subsidies that are fiscally onerous, wasteful and highly tilted against the poorer segments of society which, paradoxically, they purport to help. Still, with a production of about 16 million barrels of oil equivalent per day and a daily consumption of 12 million barrels of oil equivalent Latin America and the Caribbean would seem to enjoy a comfortable position as a net exporter of energy.

This aggregate picture, however, hides significant differences. Six countries—Brazil, Mexico, Venezuela, Argentina, Colombia and Chile— represent over 75 percent of total energy consumption. Brazil, Mexico and Venezuela have surplus energy, while the rest of the region shows varying degrees of dependence on energy imports. Latin American energy resources are formidable and diverse. Venezuela, Mexico, Brazil and Ecuador are rich in oil and gas but their politics have led to a significant underperformance of their energy industries. Currently, Brazil’s PETROBRAS and Mexico’s PEMEX are engulfed in major corruption scandals, while Venezuela’s PDVSA has been crippled by corruption and politization.

A more speedy and effective development of Latin America’s energy resources will require the modernization of the region’s energy policies as well as the adoption of a more welcoming regulatory framework toward foreign investors. These kinds of reforms are already underway in Mexico and, to some extent, in Brazil. Unfortunately, history shows that foreign investment policies are prone to be reversed when a change in government takes place. This happened in Venezuela in the early 2000s and there is great concern that Mexico’ recently adopted oil policies may be reversed after next year’s presidential elections. Brazil’s current political turmoil may also lead to a punitive revision of its energy policies. The future of energy in the region clearly seems to point to renewables, which already represent 53 percent of electric generation capacity, almost three times higher than the world’s average. Countries such as Costa Rica and Paraguay generate almost 100 percent of their electricity from renewable sources such as hydropower and geothermal energy while last year Uruguay generated 92 percent of its electricity from renewable sources. In 2014, the world’s investment in renewable power and fuels reached US$270 billion, with a significant share directed to Latin America. The immense resources of solar, wind and geothermal energy found in Latin America may perhaps alter the region’s politics of energy. Renewables may not be as vulnerable to the hindering effects of nationalism and statism that have created the enormous gap that exists between potential and reality in the oil and gas sectors. There are several reasons for this optimism. One is that because renewable energies are more environment-friendly they are more aligned with the stated preferences of the population. In 2015, a Pew Research Center survey found that 77 percent of Latin Americans reported being concerned about climate change—the world’s largest percentage. A second reason is that the development of renewable energies can be undertaken by smaller, nimbler and more diverse energy companies. Oil and gas production tends to be highly concentrated in a relatively small number of large companies and the barriers to entry for newcomers are very high. This is less true for producers of wind and solar energy. It seems reasonable to expect that renewables will be less capital intensive and present less technological challenges than those needed to find and produce oil and gas. The hope is that this more fragmented industry structure should reduce the tendency of governments to seize the companies and run it themselves as they have been prone to do with hydrocarbons.

Another factor that can delay the widespread adoption of renewable energy in Latin America is the recent emergence of the United States as a powerful international competitor. Half of U.S. refined oil product exports already find their way to Latin America. In particular, the U.S. already delivers about 40 percent of natural gas required by Mexico and increasing volumes of LNG are being sent to Argentina, Brazil, Chile and the Caribbean countries. This new U.S. role as an energy provider at very competitive prices could limit the speed at which the Caribbean or the southern cone, for example, are able to build a significant capacity in renewable energies. Low oil and gas prices are hindering the development of renewables everywhere and Latin America is no exception. Nonetheless, the indisputable reality is that this region’s energy resources are significant and financial and technological requirements for their development do not seem to present insurmountable obstacles. The decisive factor will continue to be the willingness of the region’s political leaders to forsake the kinds of energy policies that have historically crippled Latin America’s ability to reach its full potential as a producer of energy.