At a time when countries, especially those in the European Union, are scrambling to find affordable energy sources to offset the loss of Russian natural gas and oil, the leftward shift of several Latin American countries will likely reduce the available supply of fossil fuels, exacerbating world shortages. That shift will also put more pressure on the United States to remain the world’s leading oil and gas producer and to become an even larger exporter of both.
In 2021, the U.S. Energy Information Administration (EIA) reported that Central and South America produced 7.3 million barrels of crude oil and lease condensate per day (MBOPD). That’s about 9% of global production.
It could have been much more. And, in fact, it was more before a few leftist governments came to power in Latin America. But it may also mark a high point since even more Latin American countries are turning left.
From the mid-1990s to the early 2000s, Venezuela and Mexico were Latin America’s leading oil producers, about 3.5 MBOPD each. Both counties have national oil companies and have suffered from inefficiency and underinvestment.
But Venezuela’s production has declined 82% from its peak, while Mexico’s has declined 37%. That production decline is not because either country is running out of crude oil. Venezuela is the world’s leader in proven oil reserves, 298 billion barrels. Mexico is 18th with 9.8 billion — not a lot, but enough to keep producing at higher levels for years to come.
What happened? Socialism.
In 1999, Hugo Chavez became president of Venezuela promising a “Bolivarian Revolution,” a socialist political program emphasizing nationalism, a centralized economy, and redistribution of wealth — though poverty and hunger are the only things that have been widely redistributed.
The Venezuelan economy is largely based on oil. And at one time it significantly relied on private sector companies to help extract, transport and refine that oil.
In 2002, Chavez began re-nationalizing the country’s oil and gas industry, expropriating assets of foreign companies, precipitating an exodus of both capital and expertise. As a result, oil and gas production began to level off or decline. Chavez-crony Nicolas Maduro went even further, precipitating a mass private sector exodus.
With little maintenance capital to deploy and limited remaining knowledgeable human capital to deploy it, the country with the largest proven oil reserves struggles to produce 0.5 MBOPD today, about a one-seventh of its peak production.
Fortunately, Mexico hasn’t followed in Venezuela’s footsteps — yet. That may be changing.
Mexico removed barriers to attract foreign investment in its energy sector under Presidents Vicente Fox, Felipe Calderon and Enrique Pena Nieto, but any gains are fading under leftist President Andrés Manuel López Obrador.
Lopez Obrador says he wants to see “the people benefit from the nation’s oil resources.” History shows us that when “the people” own something, the government class tends to disproportionally benefit.
Brazil has clearly taken a different path. Brazil’s proven oil reserves at 15.3 billion barrels, yet its current oil production far surpasses Venezuela and Mexico. Why? Foreign investment.
While Brazil has a national oil company, Petrobras, many leading international oil companies — e.g., Shell, Exxon, BP and Chevron — may partner with Petrobras.
The superiority of Brazil’s traditional, pro-market energy investment climate, where there was little to fear from expropriation or non-payment, has been the key.
However, that history of a workable public-private partnership may change with the reelection of leftist Luiz Inácio Lula da Silva to the presidency. Will he embrace the longstanding public-private partnership in energy production, or follow other leftist Latin American governments in restructuring or scaling back those partnerships?
After Venezuela, Mexico and Brazil come Columbia and Argentina. Neither has been a major oil producer, but Argentina’s willingness to keep voting for socialists and Columbia’s recent embrace of its first leftist president means the best we can hope for is stable, or just gradually declining, oil production.
Importantly, Russia is on the prowl. It would love to fill the oil-production expertise gap created by pushing out private sector companies, and many Latin American countries have been, or will be, willing to do just that.
The leftward turn of many Latin American governments is yet another reason why the Biden administration needs to end its war on U.S.-produced fossil fuels. Otherwise, the energy shortages facing Europe will find their way to the states.