A Tango of Oil Money and Prosperity
The quest for treasure has transformed over the centuries. While pirates once explored land and sea for precious chests, we now seek the riches of black gold. Oil’s power cannot be overstated. As Mikhail Gorbachev, former President of the Soviet Union, observed, "The discovery and sale of oil have changed the face of nations, making deserts bloom with progress and cities where there were once only villages." Indeed, Saudi Arabia and the United Arab Emirates now hoist skyscrapers and business centres thanks to their discovery of oil. However, this narrative of prosperity is not universal. Nations must be wary of the ‘oil curse’—a paradox where resource-abundant countries reflect economic decline and corruption instead of the expected prosperity. Latin America presents this convoluted story through a dance of blessings and curses amongst oil giants.
The Oil Industry's Producing States
Hydrocarbons and minerals have transformed many of Latin America's agrarian societies into prosperous industrial economies. In the latest example, newfound oil has begun to revolutionize Guyana. Pensions have increased, and what were once dirt roads are now becoming four-lane highways. Recent memory hasn’t proved as kind to fellow regional players. In fact, a dramatic reshaping of the region’s oil hierarchy has been witnessed over the past fifteen years. Despite a consistent global uptrend in oil demand, traditional titans in Venezuela and Mexico have been stuck in a regressing state. Meanwhile, Guyana and Brazil have ascended. Therefore, the path to prosperity is not a guarantee. Industry mismanagement, political instability, and pervasive corruption highlight some of the challenges faced by nations in the region.
Figure I: Major Latin American Oil Producing Countries Fact Table
Sources: IEA; Oilprice.com
One of the initial global oil powers, Venezuela has gone from the heights of being the third largest producer post-WWII and founding member of OPEC in 1960 to a nation riddled with social instability and government turmoil due to persistent mismanagement following the 1980s oil glut. By the decade’s end, the persistently low oil prices had caused severe economic contractions, leading to soaring inflation and debt levels that ballooned to $33 billion by 1989. IMF bailouts were contingent on austerity measures that wiped social programs and spiked corruption, albeit restoring some economic growth.
The resulting turmoil laid the conditions for an attempted 1992 coup by an ambitious military officer, Hugo Chávez, who formally came into power in a 1998 election. Chávez’s socialist Bolivarian revolution was underpinned by increasing oil production to fund social programs and reduce poverty, plans that translated into initial success. However, Chávez focused on rigging the political and economic system to keep himself in power rather than addressing Venezuela’s evident acute issue, a lack of economic diversification. This issue has only exacerbated since.
With an almost absolute dependence on oil export revenues, Venezuela, under various recent leaderships, has yet to understand the cyclicality of oil markets and the need for counter-positioning. Under Chávez's handpicked successor, current president Nicolas Maduro, the oil price collapse in 2014 reopened familiar wounds. This resulted in spreading hyperinflation and economic freefall. The devaluing currency caused prices to soar in the predominantly import-dependent economy. A following heavy blow has been exorbitant U.S. sanctions on Venezuela's oil industry beginning in the Trump era and continuing under Biden. They have excluded state-owned PDVSA’s participation in U.S. capital markets and caused indefinite U.S. oil giant production shutdowns. With a major end market now blocked and a lack of expertise to process its thick crude, Venezuela has found itself producing 24% of what it was 10 years ago, based on 2021 data.
For Guyana—Venezuela's small neighbour—the oil journey began only as recently as 2015. Eight years ago, U.S. oil and gas giant ExxonMobil discovered a series of oil fields in offshore Guyana. After the taps turned on in 2019, Guyana has not looked back. Its initial 380,000 barrels a day of production is expected to climb to 1.2 million by 2027. Economic growth is also skyrocketing, with 62.3% real GDP growth in 2022 (the highest of any country), 38.4% in 2023, and a projected 26.6% change for 2024. The foreign operating companies are just as happy. In one of 2023’s largest M&A deals, Chevron bought out smaller rival Hess for $53 billion. A core strategic rationale was its 30% stake in the ExxonMobil-led offshore consortium, where a single leased block of dozens is valued at $41 billion.
Perhaps the best indicator of oil sparking prosperity is that Venezuela has suddenly revived its over half-century dormant land claim over Guyana’s Essequibo region. Comprising two-thirds of Guyana’s land mass and, importantly, the oil-rich waters, Venezuela’s Maduro has lodged himself into a baseless yet vocal dispute over the land in an attempt to distract from his disastrous leadership and rally political support ahead of pivotal 2024 elections.
Also once one of the largest oil producers globally, Mexico now holds the title of the second-largest oil player in Latin America. Mexico is a mature nationalizer, with its oil industry under Petróleos Mexicanos (Pemex) since 1936. Time has proved that this strategy has not served Mexican national interests as intended. Waves of issues, including mismanagement, underinvestment, and delayed technology adoption at Pemex, led to long-awaited energy reforms in 2013. These changes reopened the oil sector to private and foreign investment.
Despite catalyzing over 100 exploration and production contracts totalling $41 billion in capital commitments across different streams of energy production, actual progress towards meeting oil production targets was hindered by volatile prices, inherent risks associated with deep-water projects, and overly ambitious short-term goals. Six years later, Mexico’s new President, Andrés Manuel López Obrador, partially reversed the energy sector liberalization and a return to energy nationalization.
Throughout these policy flip-flops from 2013 to present, Mexico’s oil output has declined by 30%, almost entirely reflecting Pemex’s continued issues. While the government will likely have to take on some of Pemex’s debt mountain, it is important to realize that Mexico’s energy curse pales in comparison to other Latin American states given successful diversification through manufacturing, contributing a third of GDP.
Brazil marks a Latin American country that has been getting things right. Surpassing Mexico in oil production in 2015, Brazil's steady growth has led to its emergence as the top regional producer and is on course to becoming the world’s fourth-largest. Managed under Petrobras since the 1950s, Brazil has demonstrated how to be successful under the nationalized model.
Brazil’s achievements can be traced largely to the 2006 discovery of the Lula oil field, an ultra-deepwater field far off the coast of Rio de Janeiro estimated to have 8.3 billion barrels of recoverable oil-equivalent resources. On top of being one of the most significant oil discoveries in recent history, potential profits are massive with pre-salt oil costing around $35/bbl to produce, which can be sold at a current market price of $72/bbl. In gearing for commercialization of the field, regulatory framework changes allowed for production sharing. These changes facilitated the creation of a Petrobras-controlled consortium in the Lula field, with foreign oil giants' investments enhancing technical capabilities and production capacities.
Figure II: Latin America 10-Year Oil Production
Source: IEA
Oil’s Local Effects
In Guyana, the rapid economic boom is spurring socioeconomic concerns, especially against the backdrop of the country's ethnic makeup of 40% Indian descent and 29% African descent populations. Political leaders are wary of the potential for oil wealth to deepen social inequalities and cause a resource curse, similar to the situation in neighbouring Venezuela. Corruption and equality are chief issues that the government will need to harness control of. While easy to identify and hard to achieve, steps are evident for Guyana. The country has successfully renegotiated the previously unfavourable production-sharing agreement with foreign operating firms, notably introducing a 10% tax and increasing the royalty rate from 2% to 10%. Further suggestions commentators provide for the nation include replicating the sovereign wealth fund strategies of Norway and Middle Eastern countries and establishing effective monitoring and regulatory bodies as seen in Brazil.
Increased oil production in Brazil, particularly from pre-salt reserves, has kickstarted job creation in regions like Rio de Janeiro and Espírito Santo, where oil production is concentrated. Overall economic growth stemming from oil exports has resulted in improvements in public services and infrastructure in some regions, such as the construction of roads, schools, and hospitals. However, income inequality persists through oil royalties, of which under 20% of Brazilian regions are collectors. While royalties have been primarily distributed into education and health sectors, spillovers to non-collecting regions are weak. Moreover, environmental concerns surrounding oil spills and deforestation have mounted. For instance, a 2019 oil spill, the most extensive ever recorded in tropical oceans, posed devastating socioeconomic consequences among vulnerable coastal communities.
After oil prices plunged from over $100/bbl in 2014 to under $30/bbl in 2016, Venezuela descended into an economic and political spiral. Massively dependent on the oil sector, the petrostate’s GDP shrank by roughly three-quarters between 2014 and 2021. Though prices have since recovered, Venezuela continues to navigate a state of turmoil, as hyperinflation and shortages of basic necessities have severely impacted lives. Over 90% of Venezuelans suffer from poverty, while three-quarters are experiencing extreme poverty as conditions continue to dwindle. In 2015, Venezuela instituted per-person grocery limits and fingerprint scanners to address a major shortage in basic goods stemming from the oil crash. Low wages, incommensurate with hyperinflation, and non-existent employee benefits have caused a mass exodus in professional talent—doctors and healthcare staff in particular have been hit hard, with over 42,000 workers leaving in recent years. Furthermore, the rising cost of living, with no end in sight, has prompted millions of citizens to flee to neighbouring countries, creating a significant refugee crisis as political instability further exacerbates a major humanitarian crisis.
With Mexico’s oil production declines, impacts have been seen in public services such as healthcare and education. Around a fifth of all tax revenues collected by the Mexican government are from the oil industry, thus largely Pemex. A reduction in government revenue has made it challenging for social needs to be addressed. Furthermore, job losses in the oil sector, particularly in states like Tabasco and Veracruz, have contributed to economic challenges and social tensions among workers and their communities. Mexico's energy reform efforts, aimed at attracting foreign investment and modernizing the oil industry, have faced opposition and legal challenges, creating uncertainty about the sector's future. Though oil revenues still generate over 10% of Mexico's export earnings, Pemex’s aging infrastructure continues to decline.
Fitting in the South American Puzzle Piece
Latin America’s oil industries are uniquely positioned within the competitive global landscape. According to the International Energy Agency (IEA), worldwide consumption will rise by 1.1 million barrels per day (bpd) in 2024, growth that is projected to rise alongside improving economic growth and lower interest rates. The global transition away from fossil fuels towards cleaner energy forms, stalled by the pandemic, is expected to be a gradual process, becoming more significant in the 2030s and beyond after oil demand potentially peaks. However, long-term demand will depend on how efficient and widespread other forms of energy become. Infrastructure bottlenecks stall the still-emerging clean energy movement from optimally capturing and distributing energy. Therefore, there is a pathway in which traditional forms of fuel continue to garner heavy demand.
Globally, oil prices are projected to gradually rise in the short term. Though the COVID-19 pandemic induced a substantial drop in demand that resulted in a collapse in price, OPEC+ production cuts served as a stabilizer amid turbulent times. As economic recoveries continue to take place worldwide, oil prices are projected to remain fairly steady in the short term, as market conditions remain heavily shaped by OPEC influence. Down the line, however, expectations are more mixed as the transition to alternate forms of energy looms large. If demand continues to rise while modern energy infrastructure is insufficient, pathways to producing natural resources may become scarcer, and the resulting shortage could send prices skyrocketing. On the other hand, oil price projections in 2030 could fall as low as $40/bbl if global fuel consumption falls in line with the emission targets set to limit global warming, according to energy consultancy Wood Mackenzie.
Long-term pricing will depend on many global variables, but if this volatility does translate into a rise and subsequent price crash, producing nations could deal with a situation akin to the shale boom and crude pricing collapse of the 2010s. During the plummet in oil valuation, the economies of Latin American producers suffered, especially that of Venezuela given its dependence on oil revenue. These challenges manifested within national politics, as well, due to tensions rising between the public, political parties, and the oil producers themselves.
If oil prices continue to rise into the foreseeable future, rising producers including Guyana and Brazil will flourish. Guyana, in particular, stands to reap many benefits. The rapid growth within their oil sector has catalyzed economic modernization and diversification plans, especially in relation to transportation infrastructure, housing, and raising human capital. However, Latin America’s most dominant producers must still prepare for emerging technologies, such as electric vehicles and renewable energy sources. For instance, in 2023, Brazil launched a $350 billion investment plan involving a transition to green energy sources within an overall reindustrialization strategy. Regardless of trajectory, all producers will look to bolster investment in more modern forms of fuel as the ways our world is powered grow increasingly dynamic.
While Latin America held a 6.8% market share of global oil production in 2022, this percentage has steadily declined since 2015, when Latin America’s market share was closer to 9.3%. Mainstay producer Venezuela, which contains the largest oil reserves in the world, suffered a collapse in production after years of political unrest, poor management of PDVSA, and U.S. sanctions. While the country has managed to restore some production under sanctions, a large determinant in the oil industry’s future success is the easing of sanctions. While a quid pro quo rollback of restrictions was achieved in October 2023, Maduro has so far not held his end of the deal to allow for fair political opposition ahead of the election this year. Some lifted sanctions have recently been snapped back in response, with a full oil-targeting reinstatement on the horizon. These measures will continue to squeeze the oil industry, keep foreign-producing firms out, and continue the flow of inbound refugees that the U.S. is currently struggling with.
Similarly, Mexico is also losing ground, as Pemex has been the most indebted oil company in the world for several years on end. Though non-Pemex production has bridged some production gaps, Mexico has shifted to become a net importer rather than exporter, and so overall production is expected to continue gradually decreasing.
Contrastingly, nations such as Brazil and Argentina have become increasingly production-heavy. Once a net oil importer, Brazil is now a net exporter, taking advantage of offshore pre-salt clusters. As the world’s eighth-largest oil producer, Brazil exported over 1 million barrels of oil per day (mb/d) in 2022, a figure that is expected to continue growing as the nation continues to invest in the oil sector; top producer Petrobras has committed to invest $100+ billion over the next five years.
Latin America and the Caribbean produced over 8 mb/d in 2022, exceeding regional demand and boasting a production value of $230 billion, with additional resources available to ramp up production. Predominantly led by Brazil and Guyana, the region as a whole is in position to increase exports and occupy a marginally larger slice of the global pie, at least in the short term before demand for oil plateaus. What is surely top of mind for the region’s ascending oil powers is avoiding the mistakes that led to Venezuela's oil curse. Although the lessons are there, they still must perform their dance with careful coordination on the path to prosperity.