Don't cry for me, Venezuela

June 8, 2011

Hugo Chávez is a 50-years behind times anachronistic male version of Eva Peron. But he has been elected by the Venezuelan people and he must be reckoned with not just because it is the democratic thing to do but because Venezuela is crucial to America's energy security, more important than ever. With the price of oil flirting with $100/bbl and the US immersed in a highly politicized debate over how to reduce gasoline prices, which ultimately means increasing supplies, Latin America, and especially Venezuela, stands as probably the best available shot, one historically largely overlooked by policy makers.

Recent political instability throughout the Middle East and Africa, coupled with rising demand and proximity to Asia, and the market's reaction to both, highlight the need to secure more oil supplies elsewhere to bolster US energy security.

By 2020, US liquids demand will increase slightly more than production, under the IEA assumptions, but oil demand for transportation fuels will increase by 2.5 million barrels per day by 2035.

That leaves liquids imports, which according to the Energy Information Administration (EIA) accounted for 62% of total consumption in 2009. This is the result of importing more than 50% of crude oil used in the country (about 8.5 million barrels per day from which 60% will lead to gasoline and diesel) plus 3 million barrels per day of imported gasoline. Growth in unconventional liquids production in Canada and the US, which will increase by 1.4 million barrels per day by 2020 mostly from biofuels in the US and oil sands in Canada, are constrained by prices and shifting policies.

The best option is thus Latin America, which has the world's second biggest oil reserves. The region though has been consistently off the radar screen to US policy makers, despite offering some of the best options to secure supplies in what unquestionably will be a future of increased competition for resources. The EIA sees little change in overall production from Latin America, despite a 1 million barrels per day increase in unconventional liquids mostly from Venezuelan heavy oil deposits and Brazilian biofuels. By 2020, Venezuelan and Ecuadorian conventional production will shrink by 0.4 million barrels per day, a scenario based on inefficient policies in both countries. Mexican and Chilean supplies decrease by 1 million barrels per day, while Brazil, Colombia, and the rest of South America will increase conventional production by 1.2 million barrels per day.

Latin America though could at least double its oil production under different political circumstances, namely in countries like Venezuela, but also with a shift in US policy toward the region to promote more investment.

Friendly investment policies in Colombia and Brazil will boost regional output as expected, but that is restricted due to limited proven reserves in Colombia and the technical difficulties of most of Brazil's offshore, deepwater, subsalt deposits. Mexican production is expected to fall, not only because of regulations limiting foreign investment, but especially because of peaking wells. That could change with significant Gulf exploration, but that is highly uncertain considering Mexican political instability. Ecuador, even with a revamp of policies to attract more foreign investment, does not have game-changing reserves, nor do Argentina, Peru, or most other Latin American countries.

That leaves Venezuela, which holds at least 150 billion barrels in conventional and unconventional reserves. Under current trends, production there is not likely to pick up because of the inefficient policies of the Chavez administration, and will likely only recover the estimated 1 million barrels per day output decline that started a decade ago.

But Venezuela is precisely where US policymakers should be looking to alleviate its deteriorating security of supply. Most analysts believe the country could at least double its production of an estimated 2.5 million barrels per day this decade with appropriate investment. Instead of promoting investment in Latin America's energy sector with a coherent policy, the US has looked the other way while American companies have gradually moved out of the region, only to be replaced by European and Chinese companies.

There is no easy answer, but a new approach is required. It will inevitably involve dealing with Chavez, who most analysts see remaining in power at least for most of the decade. Efforts to alienate the anti-American president have backfired and now even Colombia, the most important American regional ally, is moving to stabilize its relations with Venezuela, faced with Washington's apathy. Latin America could still achieve significant production increases if Venezuela gets its act together with the help of other global players, mostly Chinese. But it's becoming ever more likely that the US will not benefit as much as it could from any bonanza.

So why don't the White House and Congress put off at least some of its unhelpful, pre-electoral, unrealistic debates about market manipulation, oil company subsidies and the like, and redraft American policies to Latin America?

That is the best hope to alleviate pump prices and address American energy security, in this decade and beyond. OE


Michael J Economides is a professor at the Cullen College of Engineering, University of Houston, and editor-in-chief of the Energy Tribune. André Cala is its European Correspondent. The views expressed in this column do not necessarily reflect OE's position.



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