Saturday, November 10, 2007

Oil Increasingly an Important Part of Latin American Landscape

Bloomberg - Lula Says Brazil Oil Find May Lead to OPEC Membership
New York Times Magazine - The Perils of Petrocracy

Oil headlines have dominated the Latin American news cycle recently, with the Brazilian announcement of 8 billion barrels of reserves only the latest indication of the increasing importance of oil to the region. The announcement regarding the potential of the Tupi oil field led Brazilian President Lula de Silva to speculate that Brazil might eventually join OPEC. The announcement boosted Brazil's proven reserves by two-thirds.

Developing countries' oil reserves, including those in Latin America, have been gaining importance as traditional oil fields controlled by multinational corporations have reached their limit of capacity and production. Venezuela, the lead producer in Latin America, uses oil proceeds to fund a substantial portion of its increasing government spending. Ecuador, although a relatively small producer compared to other countries, recently re-joined OPEC and has seen its oil profile grow.

The state governments in Latin America have been the primary beneficiaries of the rise in oil prices and increasing oil production, as much of the exploration is done by state-owned companies: Petrobras in Brazil and Pdvsa in Venezuela. However, the boon of oil reserves brings with it the rising cost of exploration. It is estimated Petrobras will have to invest $112 billion in the next several years to develop the Tupi field. Some say that Pdvsa, although very profitable due to the high price of oil, has neglected to put money back into development and infrastructure, rather existing as a personal coffer for President Hugo Chavez's social projects.

As long as oil prices continue to rise, it appears that oil in Latin America will continue to increase in importance and generate a windfall for government revenues. It is unclear, however, the long-term effect increasing oil production will have on the region or what will occur when oil prices drop.

1. Theorists have spoke of the "curse" of abundant natural resources and the resulting poor economic performance and long-term growth prospects of those countries. How can countries with abundant natural resources parlay those into long-term economic growth and sustainability? More specifically, how can countries enjoying the benefits of high oil prices plan for the future when oil prices will be less impressive?

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