As Latin America shifts left, oil production could fall

It could be much more. And, in fact, it was more before some leftist governments came to power in Latin America. But it could also be a high point since more Latin American countries are turning left.

From the mid-1990s to the early 2000s, Venezuela and Mexico were the main oil producers in Latin America, at around 3.5 MBOPD each. Both counties have national oil companies and suffer from inefficiency and underinvestment.

But Venezuela’s production is down 82% from its peak, while Mexico’s production is down 37%. The reason for the decline in production is not that either country is running out of crude oil. Venezuela is the world leader in proven oil reserves, 298 billion barrels. Mexico is 18^th with 9.8 billion — not much, but enough to continue 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 that emphasizes nationalism, a centralized economy, and the redistribution of wealth – although poverty and hunger are the only things that have been widely redistributed.

Venezuela’s economy is heavily based on oil. And at one time it was heavily dependent on private sector companies to extract, transport and refine that oil.

In 2002, Chavez began renationalizing the country’s oil and gas industry, expropriating the assets of foreign companies, allowing capital and expertise to be redeployed. As a result, oil and gas production began to level off or decline. Chavez-crony Nicolas Maduro went even further, leading to massive corruption in the private sector.

With little maintenance capital to deploy and limited skilled human capital to deploy it, the country with the largest proven oil reserves is struggling to produce 0.5 MBOPD today, about a seventh of its peak production.

Fortunately, Mexico hasn’t followed in Venezuela’s footsteps – yet. That may be changing.

Mexico removed obstacles to attract foreign investment in its energy sector under Presidents Vicente Fox, Felipe Calderon and Enrique Pena Nieto, but any gains are diminishing under leftist President Andrés Manuel López Obrador.

Lopez Obrador says he wants to “see the people benefiting from the nation’s oil resources.” History shows us that when “the people” own something, the ruling class tends to benefit disproportionately.

Brazil has clearly taken a different path. Brazil’s proven oil reserves stand at 15.3 billion barrels, but its current oil production far exceeds that of Venezuela and Mexico. Why? Foreign investment.

Although Brazil has a national oil company, Petrobras, many leading international oil companies – e.g. Shell, Exxon, BP and Chevron – partnering with Petrobras.

Most important is Brazil’s traditional pro-market energy investment climate, where there was little fear of expropriation or non-payment.