Oil boom falls flat in region with fifth of world’s reserves

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

All over Latin America, the upside of $100 crude has been blunted by nationalist policies that tightened government control of the energy industry and sidelined the foreign investors who had helped boost production. Output from Brazil and Guyana is rising, but across the region as a whole, production has fallen so much that it’s now barely meeting 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 pricey fuel imports is putting the leaders of Latin America’s oil-producing countries squarely in the political crosshairs. Facing backlash from cash-strapped motorists, Brazilian President Jair Bolsonaro is trailing his main rival ahead of the October election. Ecuador’s president was nearly impeached following protests over fuel prices and inflation. Mexico is spending billions to subsidize gasoline.

All this means the world can’t count on Latin America to ramp up output of oil and natural gas as Russia’s invasion of Ukraine squeezes global supply. While producers in the U.S. and the Middle East are adding production, it’s not enough to halt the rampant price increases that threaten to trigger fuel rationing and topple economies into recession.

“The oil industries have been victims of 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 capacity to do what (Venezuela’s Hugo) Chavez did in 2003 and 2004, to build up massive spending.”

Of course, trade balances would be even worse for Latin America’s state-owned oil exporters if crude prices hadn’t soared this year. Brazil’s Petroleo Brasiliero SA and even Mexico’s heavily indebted Petroleos Mexicanos are reporting stellar profits and paying robust dividends. But it takes time for higher tax revenue from crude exports to make its way into government coffers, and only a prolonged supercycle would eventually bring relief to the strained region.

The wider economic benefits of the oil rally haven’t 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 in large part to commodities, is the favorite to replace Bolsonaro in the upcoming election. Mexican President Andrés Manuel López Obrador has sought to strengthen state companies by eliminating rules and regulations that fostered a more competitive market.

In Monaldi’s view, Latin America’s oil fields would be pumping 20 million barrels a day, more than double current levels, if producers there had all the benefits enjoyed by drillers in business-friendly Texas: easy access to capital, low taxes and light regulation. Instead, interventionist policies — like seizing oil field stakes from foreign partners, hiking taxes and failing to explore areas ripe for drilling — are coming home to roost.“It is astonishing how bad the above ground risks are and how they have affected the industry’s potential,” Monaldi said in an interview.

This year’s biggest gainer 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.

In total, the International Energy Agency is only expecting an additional 400,000 barrels a day this year from Latin America, a third of expected growth in the U.S.