Oil price hike relieves several oil-rich Latin American states

RIO DE JANEIRO, BRAZIL – In April 2020, in full pandemic, oil was anathema and those Latin American and Caribbean countries that depend on its sales to grow and stabilize their public accounts – and they are many – suffered from the shock of low prices.

A year and a half later, reality is quite different: the crude oil barrel is above US$80, almost US$60 more than it was 18 months ago. Brazil, Colombia, Argentina and Guyana, and to a lesser extent Mexico, Ecuador and Venezuela, are being provided a powerful boost that few had in their sights.

“We are still far from the peaks, but these are high prices in historical comparison,” points out energy expert at the Baker Institute Francisco Monaldi.

“The question is how long will they last: if for a short period, the impact will not be very significant, but if they last they will be a very important respite for many countries in the region. Raw materials, particularly oil, remain very important.” A piece of information speaks for itself: with the barrel at current levels, “all Latin American oil fields are profitable,” stresses consulting firm Wood Mackenzie’s head for Latin America Marcelo de Assis.

COUNTRIES BENEFITING FROM THE BOOM IN INTERNATIONAL OIL MARKETS

BRAZIL

In a few short years, the undisputed regional leader ceased to be a country affected by oil price hikes, which worsened its trade balance, and began to clearly benefit from it. “Historically, whenever prices went up, it was a tragedy. Now it’s good for Brazil,” says Monaldi. Meanwhile, several important discoveries have turned the country into one of the key names on the world oil map and the largest net oil exporter from Ushuaia to the Rio Grande.

In 2020, despite the pandemic, Brazil raised almost US$20 billion as a result, and this year is expected to exceed that figure by a considerable margin. Moreover, it is one of the countries most benefited from not belonging to the Organization of Petroleum Exporting Countries (OPEC) cartel, which in recent years has imposed quotas on its members in order to reduce total supply and stabilize the market.

Exempt from this limit, Brazil seized the opportunity to increase its sales to Asia, by far the largest oil importing continent. “It is the bloc’s greatest beneficiary,” points out Inter-American Dialogue analysis center’s head of energy Lisa Viscidi. “It exports heavily, especially to China, and sales have remained high even in the worst moments of the pandemic.”

ARGENTINA

A joke was spreading last year in the power circles of the regional extractive industry. The Vaca Muerta (“dead cow”) deposit – the great Argentine oil hope – was said to be deader than ever. “However, it can now be said that Vaca Muerta is very much alive,” notes Baker Institute’s Monaldi.

Because it is an unconventional oil – also known as shale – the 30,000 km2 of gas- and oil-filled ground in Patagonia needs higher prices to be profitable. “But at current prices, they definitely are,” emphasizes Viscidi. Argentina’s old dream of becoming an exporter rather than a net importer of oil on a sustained basis is drawing closer: according to International Energy Agency (IEA) statistics, in the very troubled 2020, the country narrowly succeeded.

“Unconventional extraction needs prices of US$40 or higher to be profitable. The case of Vaca Muerta is very clear: at the current price, the opportunities it offers are very good,” says Latin American Energy Organization’s (OLADE) executive secretary Alfonso Blanco. Nevertheless, Argentine facilities “still need more foreign investment to be able to expand production in this area. And there the challenge is not the sale price, “but rather a macro or political environment that continues to be perceived as very risky.”

In a particularly complicated moment for the Argentine Treasury, the increase in revenue is equally remarkable. For the province of Neuquén, where Vaca Muerta is located, the price hike will give needed relief to its public accounts, something it had not expected at the start of the year.

For the government of Peronist Alberto Fernández, oil is a source of foreign exchange that cannot be ignored. In early October, the government sent to Congress the bill for the Law of Promotion of Investments in Hydrocarbons, which intends to attract investments to, precisely, Vaca Muerta.

The bill foresees an incentive scheme based on the guarantee of greater export permits and the availability of foreign exchange for projects that ensure an increase in the production of gas and oil. But the benefits of higher oil prices have their downside in gas. Just as Argentina exports its oil surplus, it imports gas, which comes in liquid form by ship to ports south of Buenos Aires or by pipeline from Bolivia. The balance of the hydrocarbon complex in 2020 was negative by almost US$1.9 billion, according to the Central Bank’s balance.

COLOMBIA

If oil remains at current price levels, the jump in Colombia’s tax revenue will be substantial: state accounts were done with a US$63 per barrel projection, US$20 below its current level. But the implications would go far beyond the fiscal arena.

“Although production is not very high in global comparison, oil exports are crucial to its economy: it is one of its main sources of foreign exchange and is critical to the exchange rate of the Colombian peso,” Viscidi points out. According to the latest figures from the IEA, Colombia is the second Latin American country in net oil exports (discounting imports).

However, production has been dropping in recent years, in a process that Assis describes as a “natural decline.” In the first 8 months this year, 732,000 barrels were pumped, 7.8% less than in the same period in 2020. In August, for the first time in 2021, production grew in the year-on-year comparison and the drilling of 4 exploratory wells and 40 development wells began. The government estimates that the increase will be sustained until the end of the year.

In addition to oil, the favorable price environment in energy markets has a second beneficial impact for Colombian interests: the country is the only regional exporter of coal, the price of which has skyrocketed recently, reaching historic highs.

MEXICO

Although the net result is positive, the rise in oil prices has a mixed effect on Latin America’s second largest economy: its exports, which have the U.S. as their main destination, have improved, but the gasoline that Mexico imports in large quantities from its northern neighbor is also becoming more expensive. “Higher prices help it, no doubt, but its domestic demand continues to grow and therefore its imports also rise in both price and volume,” Viscidi explains.

The second chapter is related to the Treasury. And here the balance is clearly positive: since the start of this year, oil revenue has far exceeded forecasts and is managing to mitigate the poor tax collection numbers, the result of an economy that has not yet recovered all the ground lost in the pandemic.

And lastly, Pemex, the state-owned oil company, which is still the most indebted in the world in its sector and has accumulated huge losses in recent years, comes into the picture, albeit still of capital importance for Mexico’s economy. In a sense, the future of both runs parallel.

“The price increase is also important for it, but its real problem is production: it needs to upgrade the most mature fields, and to do that it needs to invest,” points out Wood Mackenzie’s head of Latin America. “This rise will not have the effects it would have had a few years ago, when production was higher, but in general it will be positive,” Monaldi believes.

VENEZUELA

The monthly price of the oil basket was a traditional focus of attention in national information and analysis spaces. However, the collapse of the oil industry in the years of Nicolás Maduro has put an end to this scenario: today the country produces barely more than 450,000 barrels per day, compared to 3 million not so long ago. In this context, the rise in oil prices is of much less interest today.

The impact of high prices on the Venezuelan economy will be positive, but very limited. “The U.S. embargo remains, there is a serious problem of oil infrastructure and no prospect of improved production, so the country will not feel a big change,” Assis says. Unlike before, Venezuelan oil access to markets is very complicated and what is sold, basically to China, is heavily discounted. “In a blockade scenario, it is very difficult for higher prices to translate into investment to restore productive capacity. Virtually all financial channels are blocked,” Blanco adds.

The essential role that oil played in the Venezuelan collective ideology as a “catalyst of the national soul” has been diluted, as explained by economist Asdrúbal Oliveros, director of the company Ecoanalítica. Although, even in the current context, “every price increase, if production is maintained, generates extraordinary revenues,” these are a far cry from any sense of bonanza that the country may have experienced in the past.

“With international sanctions, Venezuela has to sell its oil with many intermediaries and obscure financial engineering strategies to evade the sanctions mechanisms,” the economist says.

However, Oliveros estimates that the country could raise an additional US$700 million by raising oil prices. “Of the US$8 billion that the state will receive [from exports in general], US$5 billion comes from oil, and the rest includes the sale of gold and scrap metal, which has been increasing.” Somewhat more optimistic, Monaldi foresees a year “infinitely better” than previous ones, both for public revenue and GDP. However, based on the rather precarious situation that Venezuela has been experiencing for years.

ECUADOR

The dependence on oil export revenues places the country in a dilemma over the impact of the recent hike. On one hand, the government estimates that public coffers will receive more resources in the final stretch of the year, reaching US$1.5 or 2 billion, reflected in a budget adjustment for 2021. Initially, the calculations were based on the forecast that a barrel of oil would reach US$37. In September, the figure rose to US$59. And now prices are much higher.

But in the case of Ecuador, as in the case of Mexico, the calculation is not that simple. In the first place, the country does not have enough capacity to refine the gasoline needed to meet domestic demand, so it is forced to import it.

Second, because it spends US$1.9 billion annually on subsidies, a high total, although lower than in previous years due to the phasing out of distribution aid. And third, because although “it is one of the Latin American countries in which oil revenue is most important,” as Blanco explains, much of the production is committed to China at set prices.

GUYANA

On its scale, a Caribbean country incomparably smaller than other regional players emerges as the main beneficiary of the recent oil boom. “The impact is going to be very interesting,” the head of Olade says. “It’s a really exceptional case: very high growth levels were projected for oil, but the price rise represents a further boost to its economy and additional dynamism.”

Guyana is effectively the star of the last – perhaps literally – a major regional oil success: with a population of only 700,000, it was the only country in Latin America and the Caribbean that saw its GDP grow in the year of the coronavirus. Behind this feat is a single element: oil. This year’s price hike is just one more favorable driver. As if the good news were not enough, Exxon, which leads oil exploration in Guyana, has just increased the estimate of oil reserves in the Caribbean country.

Source: El País