The Politics of Energy in Latin America

The year 2006 was a tumultuous one for Latin America's energy sector. High oil prices, presidential elections in ten of the twenty countries (including in six of the seven Andean nations), and the proliferation of socialist and populist rhetoric among leading politicians caused energy analysts from around the globe to focus on predicting the consequences of politically driven decisions for the management of Latin America's rich energy resources. On October 23, 2006, the Latin American Program convened a panel of experts to look specifically at the nationalization of hydrocarbons in Bolivia, Venezuela's use of "oil diplomacy" in the hemisphere, the development of the Camisea natural gas pipeline in Peru, and increased concern over the security of U.S. energy supplies. All of these issues have served to underscore some of the intensely political aspects of energy relations in Latin America.

According to Jed Bailey of Cambridge Energy Research Associates, integration between energy producers in the Andean region and consumers in the Southern Cone reached an impasse due to the Bolivian nationalization, reversing the trend of the 1990s. As a result, gas-dependent consumers in the region—Brazil and Chile are the largest importers—began shifting their attention away from joint pipeline projects with Bolivia and toward global integration and the autonomous development of liquefied natural gas (LNG). An investment freeze in Bolivia, a linchpin in the natural gas sector of the Southern Cone, stands behind many of the problems in the region. As the Bolivian government continues to face obstacles to further development of the gas sector, Bailey foresaw the process of nationalization as likely going down one of two paths: full expropriation, driven by increased pressures from President Evo Morales's political base; or a more moderate, pragmatic approach involving both greater Bolivian sovereignty over gas resources and a compromise between the government and the private sector. A third alternative could be reliance on Venezuela to jumpstart investment. Over the long term, Bolivia faces the prospect of losing its market share in the region and being replaced by new sources of supply.

Roger Tissot, PFC Energy, situated the question of energy politics within the greater debate over economic development and the Latin American response to globalization. Economic recovery in most Latin American countries has been externally driven, Tissot observed, by a combination of low interest rates, high commodity prices, and remittances, coupled with growth in only a few, capital-intensive sectors. He linked the collapse of the import-substitution model of development, and the improvised deregulation process that followed, to a change in the way countries view energy resources. Increased resource nationalism is a product of a renewed push for industrialization, in which governments seek greater control over resources and rents in order to finance industrialization and development. He predicted that "pragmatic populists" in the region are likely to prevail, adopting technocratic solutions (microcredits, the fostering of cooperatives, etc.) to address poverty, whereas "antiglobalizers" such as Venezuela and Bolivia will be forced to redirect their policies. Tissot noted that oil companies with investments in Latin America face an especially challenging environment, given local demands not only for a greater share of oil rents but also for a role in decision-making.

Carol Wise, University of Southern California, discussed the development of natural gas in Peru. Although the proven gas reserves there are less than a third of Bolivia's, the success rate for wells that are drilled has been about 75 percent, an impressive statistic for the region. Domestic decisions over natural resource exploitation in Peru are as problematic as in other Andean countries, where massive reserves lie in fragile ecosystems and local populations demand a greater share of the benefits of resource extraction. Now, more than twenty years after the discovery of natural gas in Peru, the pipeline project known as Camisea is finally up and running. This project represents, among many things, a private sector endeavor in one of the most pristine parts of the Amazon. Wise underscored the facilitating role played by local and transnational groups and by the Inter-American Development Bank, which provided the resources to set up "institutional crosschecks" and consultations with nongovernmental organizations and local stakeholders, including indigenous groups. Wise also cited ongoing controversies over the lack of consumer incentives in the tax regime, the maldistribution of revenues to southern departments, and environmental oversight. Not only has the visible impact of wealth generated by the pipeline been scant, the question of multilateral funding for the next phase of the project will hinge on the ability of all the relevant stakeholders to adequately address the environmental problems that have arisen thus far.

David Goldwyn, Goldwyn International Strategies, LLC, argued that the energy security outlook for the United States in the hemisphere is poor due to its paying insufficient attention to the social agenda in Latin America. At first, the region's countries viewed the model promoted by Venezuelan President Hugo Chávez as an appealing alternative to the prescriptions of the Washington Consensus. Venezuela helped countries on issues that mattered to them, providing oil assistance to the Caribbean and purchasing Argentine debt. Yet, Goldwyn argued, the Chávez model of economic nationalism has peaked; it cannot be imitated without large oil rents, and many countries are as resistant to Venezuelan involvement in their internal affairs as they are to that of the United States. Bolivia has experienced difficulties with its own nationalization process and even Venezuela has struggled with the Chávez model, due to the slow development of and investment in the natural gas sector. By contrast, countries in the region with competitive, market-based economies, such as Colombia and Peru, have fared much better. The "Brazilian miracle" represented by its ethanol industry constitutes another example of market-based economic success. Goldwyn concluded that the United States needs to reengage the hemisphere on its own interests. This involves bolstering trade relations and establishing a level of trust sufficient to dispel the belief that the United States will pull out of a country in response to shifting internal political winds. The United States must demonstrate that it cares about social policy and engage governments with which it disagrees.

Drafted by Cynthia J. Arnson and Jessica Varat.