May 22, 2012
By Isida Tushe
As the global market continues to face price stability and a demand/supply model, oil is the one stable source known to affect the markets globally. The key factors that remain equisential when discussing oil investments in the Americas1 are economic and geopolitical risks. These economic and geopolitical risks affect industries and countries alike, and due to trade, capital flow, and the economy being globally linked the impact of these risks is felt around the world. While I contest that global recession has developed from financial markets going wrong, the one key element that shakes the financial markets unlike anything else is oil and this highly valued commodity plays a critical role in the present structure and future of any country that has this commodity.
Oil is the “Devil’s excrement”2 and the one commodity that is as powerful as it is counterintuitive. Finding oil doesn’t turn a country of lead into a country of gold. This fact might be hard to believe, however, it is often proven to be true centuries after exploitation has taken place and “a third world war country” label has been placed on it.
Numerous articles argue that the recently discovered oil fields in Latin America and the U.S. could increase investments in the Americas’ energy sector. The oil resources in the Americas have for years been determined by both geological and statistical data and now advanced technology has proved that this is accurate. It is easy to attract a foreign investor into the Americas by waiving a resource that is highly desirable and not easily found; but managing and containing what comes with this commodity is the problem.
Latin American’ countries are unstable economically and geopolitically. Most historians and political theorists consider it the third most unstable region in the world3. From 1971 to 2000, there have been 20 coup d’états, 451 political assassinations, 113 crises, and 217 riots that have threatened the sitting government. Political and geostrategic conflicts attract the energy investors and the trajectory. North to South America, Middle East to Africa, when you set aside the geographical, religious, U.S. involvement differences, and governing ideologies, you will see that the characteristics for a country to become a major oil producer are similar.
The first required characteristic is that there must be vast untapped source of (oil and natural gas). The second required characteristic is the instability of the government. That doesn’t mean the “U.S. version of instability” of “conservative verses liberal” thinking. Real government instability is drug cartels, assassinations, and militaristic coup d’état . The third and final characteristic is poverty, famine, and civil war, thus a need for perceived social welfare improvements. Latin American countries meet these characteristics and its economic risks are in the macroeconomic stability, asset bubbles, instable government, and geopolitical conflicts.
The oil reserves are spread out around the world. The Middle East accounts for more than 50 percent of the world’s established reserves, while Europe and Asia account for roughly 10 percent. Africa accounts for another 10 percent and the U.S. and Latin America holds one –fifth of the world’s oil reserves. With more reserves on the horizon for Latin America, foreign investors are targeting this region and shopping around. Countries like China are looking for commodities to keep their economy growing. The largest investments are seen in Brazil and Argentina, and Venezuela, where more than $32 billion has gone to President Hugo Chavez’s government4.
The government plays a key role in managing oil assets. It tries very hard to influence the tracking of energy resources among key consumer-producer players through pricing mechanisms or by passively allowing nations to exercise ownership rights to their resources. However, the real question often can be found in deeper water that is protected from the political roughness around it. Whatever political and economic instability that might have existed before in Latin American countries is now being exhibited by the increasing poverty in the region, such as corruption, poverty, and dysfunctional bureaucracy. Surging fuel prices ignite inflation, which drives up the cost of food, partially due to the fact that Latin America’s farm products are in great demand, thus increasing local prices.
Latin America is a target of global oil companies who have historic and dusty claims of infringed-upon past investments. In Venezuela, it is the oil abundance that has led to class warfare. Middle class families are pitted against lower class loyal citizens to President Chavez. In Peru, oil has been the lead factor in causing environment destruction and cultural loss for indigenous groups. The natural gas deposits making up the Camisea project might turn Peru into an independent energy capital but the Peru citizens are still frightened of what it will turn the country into. In Ecuador, citizens are still wondering what happened to their long-promised benefits; keep in mind that Ecuador has oil pipeline’s that could turn the nation into a top five supplier to the U.S. Although oil wealth is always a dream of prosperity in a land that hasn’t experienced the curse of oil before but once it is discovered, it has shown to be more of a curse than a blessing.
The people of the Latin countries, that have experienced exploitation from foreign investors before, are not taking well to the fact that is happening again. Labor protests against foreign oil companies have been the most recent newsworthy events in Colombia surrounding the energy sector. The protests have increased due to a lack of domestic jobs and weak social investment, with guerrilla forces continuing to plague the Andean nation with violence. Following the military crackdown that eventually pushed the rebels into increasingly remote hide-outs, foreign oil companies began to develop a sufficient need to encourage the exploitation of new energy sources in the country.
Military crackdown was a temporary solution that has contributed to Colombia’s ongoing violence. In a country where drug cartels, peasant groups, and right-wing paramilitary gangs are active, oil-pumping stations have become a primary target of violence since they are an easy target. On the other hand, this means that cartel lands are being hit since the majority of oil-pumping stations can be found on drug cartel-owned property. The drug war remains an ongoing, armed conflict taking place among rival drug cartels who fight for territorial control. The Medellín drug cartels control several zones in Colombia in which oil wells are located.
Countries with concentrated oil deposits are often the most unstable in the world and in a state of dictatorship. Countries like Cuba have draconic embargo trade restrictions put in place by the United States, which affects exporting heavily. One way for a government to control investments is by enforcing taxes and royalties regulations. Petroleos Mexicanos (Pemex) hands over $54 billion in taxes and royalties to the national treasury each year. This accounts for almost 40% of the government’s revenues. While Repsol YPF S.A., a majority Spanish owned company paid Argentina’s government $19 billion in taxes over the past four years, making it the country’s largest taxpayer, only to then have no control over its renationalization.
Prevailing issues that periodically manifest themselves to the world include problems that for years have engaged economic planners in Africa, the Middle East, China, and Russia. No longer true that companies that go into a country with sizeable oil reserves invariably result in an improvement in domestic jobs and a strengthening of the local economy. If this was true, why hasn’t the Libyan population benefited from a country that has produced 39.12 billions of barrels? Or one can invoke the example of Saudi Arabia, which has accounted for the production of 262.73 billions of barrels of annual oil production? Why is poverty concentrated in the poor and middle class? Or Iraq with its 115.00 billion barrels of production annually? A country with no government stability and at war. Or Nigeria, which exports millions of barrels of crude oil daily and yet the Ogoni, Ijaw, and other people in the Niger Delta continue to suffer from extreme hunger, starvation, and environmental destruction? Where are these oil earnings going? The average local citizen certainly does not benefit from them. The inhabitants that live with their five children in a two-room cinder-block house perched on a hillside in Central America are the ones feeling the strain.
In a world where oil and gas prices are largely mandated to suit how Wall Street does business and impacts the global economy, it is hard to believe that governments will independently resist more drilling in Latin America, since it will provide more options for pricing oil and gas. Increased production normally means that these prices will plummet and this will in turn exhibit the prevailing instability of these areas. The ultimate question that is being posed is whether Latin Americans want to invite these conglomerate suppliers to drill in their oil-rich countries in spite of the risks and the laundry list of negatives that drilling brings with it.
Isida Tushe is a guest scholar.
1. Countries in the Western hemisphere
2. Quoted by OPEC co-founder Juan Pablo Perez Alfonso.
3. The statistic is from Goldstone et.al.(2005)
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