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from stratfor.com
Summary
The high price of oil is becoming a serious problem for many Latin American countries. Social unrest caused by higher energy prices is beginning to spread throughout the region, and with no relief in sight, the economic and political impact of oil prices is likely to get worse – and even to become the primary regional issue in the months ahead.
Analysis
In recent days, signs of economic and social stress caused by high oil prices in Latin America – now being felt most prominently in the Caribbean and Central America – have multiplied. Gasoline prices in all Central American countries are above $4 per gallon – more than many Central Americans earn in a day.
Given the relative poverty of these countries, the high price of fuel constitutes a heavy economic burden on governments trying to subsidize fuel prices and on individuals forced to pay fuel prices. With no relief in sight, the economic and political impact of oil prices is likely to get worse – and even become the primary regional issue in the months ahead.
The pressure drove Central American leaders to visit Colombia on Sept. 13 to examine its industry for using ethanol as an alternative energy source to petroleum products. And on Sept. 14, Brazilian President Luiz Inacio “Lula” da Silva invited the group to visit Brazil to do the same. These visits constitute the first high-level considerations by Central American leaders of the need to find alternative energy sources for their petroleum-dependent economies as they face increasing problems at home in coping with persistently high oil prices.
In the most extreme example of price-related unrest to date, a proposed 19.7 percent gasoline price hike by the Honduran government along with restrictions aimed at curbing gasoline consumption prompted taxi and bus drivers in the capital to protest, forcing the government to reduce the price increase to 9.9 percent. And on Sept. 9, the first widespread civil unrest to hit the country in years occurred as protesters blocked roads and demonstrated nationwide against energy price increases. With presidential and congressional elections scheduled for November, energy prices are likely to dominate the campaign – and how voters cast their ballots.
Other Central American nations are facing the exact same problem, and are heading in the exact same direction. The dependence of Central American countries on power plants fired by petroleum products such as oil, gasoline and diesel further compounds the problem posed by high fuel costs. For example, Honduras depends on petroleum fuels for close to half of its power generation, Guatemala generates 60 percent of its power from gasoline-fired plants and Nicaragua gets 85 percent of its electricity from oil-powered plants. Consequently, power rationing is becoming increasingly likely, something which will further inhibit economic activity and increase social unrest.
Caribbean nations are feeling the pinch, too. On Sept. 12, the Dominican Republic announced emergency restrictions on gasoline consumption in an effort to reduce demand, and Jamaica already has seen mass protests as a result of fuel price increases. Thirteen Caribbean nations signed a deal with Venezuela establishing the PetroCaribe initiative, in which Caracas will sell 200,000 barrels of oil per day at market prices, but in the form of a loan that the Caribbean buyers will be able to repay over 25 years at 1 percent interest. Even with this assistance, in the long term these countries at best will be racking up enormous amounts of debt that will worsen their overall financial standing. In the worst case, they will increase their debt loads and become unable to pay even reduced energy bills. In either case, they likely will face more trouble in the near term.
South America is starting to show the strain as well. Paraguayan state energy firm Petroleos Paraguayos recently said it is operating at a loss because of the need to fund fuel subsidies, and Suriname’s public transportation system was brought to a halt Sept. 12 by drivers protesting a government decision to nearly double gasoline and diesel prices. The Chilean government, already facing a significant natural gas shortage due to an interruption of exports from Argentina, recently announced a 10-month subsidy program to cap gasoline at $5.27 per gallon, saying that without the cap, prices would have hit $6.37 in August. Santiago is being forced to use revenues from copper sales to fund the subsidy.
With no relief in the form of significantly lower oil prices seemingly in sight, the fuel-price problem should only get worse in the months ahead for those Latin American countries that are net importers of oil.
In contrast, for leading exporters such as Venezuela, Bolivia, Brazil and Mexico, energy prices are filling state coffers to the brim. This is resulting in a seeming separation of the region into, quite literally, the haves and have-nots with respect to oil. Venezuelan President Hugo Chavez in particular is taking advantage of the desperation of his neighbors to trade cheap oil for increasing political influence in the region. And every country that signs a preferential oil deal with Chavez represents another blow to U.S. influence in the region – influence that already has declined precipitously. Further eroding that influence is a key goal of Chavez’s foreign policy, and the impact of high oil prices is playing perfectly into his hands.
With the exception of Brazil, however, the region’s main energy producers are all actively driving their energy sectors into the ground – risking their good fortune and threatening their future stability. Venezuela’s Petroleos de Venezuela and Mexico’s Petroleos Mexicanos are in considerable financial trouble thanks to heavy tax burdens, low investment, restrictive regulations and generally poor resource management.
Moreover, gas and oil production in Bolivia, and now Ecuador, has proven to be highly vulnerable to the political activism of their large population of peasants and impoverished indigenous peoples. Argentina, with the region’s third-largest natural gas reserves, is so poorly managing the sector that it had to cut off exports to Chile and increase imports from Bolivia just to keep its own lights on.
If these countries are unable to improve their political and regulatory environments to allow for the proper management of state energy companies and the reserves they control, which is unlikely, regional energy output probably will begin to decline, possibly as early as 2007. Argentina’s natural gas output already is declining.
A perfect-storm scenario would see oil prices remaining high with output falling in Venezuela, Mexico, Bolivia, Ecuador, Argentina and Colombia – the last of which is scheduled to become a net oil importer in a few years despite relatively good resource management. The result would be a regional energy crisis of catastrophic economic, social and political proportions. Such a scenario is not beyond the realm of possibility given present circumstances. Nonetheless, circumstances can change – especially as regards the price of oil. So a perfect storm cannot be said to be imminent just yet.
What is likely is that in the next few months, however, Latin America will see increasing economic distress and social unrest as oil prices continue to punish energy importers in the region, further separating those with energy resources from those without. With a barrage of national legislative or presidential elections approaching in the region between now and the end of 2006 – including races in, among other key nations, Argentina, Honduras, Chile, Bolivia, Costa Rica, Colombia, Mexico, Nicaragua and many Caribbean nations – energy issues could subject the region to a bumpy ride.
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