Politics and oil go hand in hand, and the presidential elections in Venezuela and Mexico could now signal a potential change in the oil landscape of Latin America.
Until now, the declining output in the two countries has underpinned crude prices. In 2001, the combined production of Venezuela and Mexico totalled roughly 6.7m barrels a day of oil. A decade later, this fell to 5.6m b/d, according to the BP Statistical Review of World Energy, forcing Middle East producers such as Saudi Arabia to pump more. As Riyadh boosted output, its spare capacity fell – a bullish factor for the market.
The elections now offer a chance to reverse the drop in production – or, at the very least, stabilise it. Add to the mix the expected increase in oil output in Brazil, and the already impressive growth in oil production in Colombia, and Latin America could very soon start adding, rather than subtracting, to global oil production.
The most important change is in Mexico, where on Sunday Enrique Peña Nieto, the candidate of the centre-left Institutional Revolutionary Party, or PRI, won the presidential election. Mr Peña has promised to reform Pemex, the state-owned oil monopoly that is behind the drop in oil production. The company badly needs access to technology to explore the deep water of the Gulf of Mexico, but until now Mexican politicians have refused to open the sector to foreign companies.
Mr Peña told the Financial Times last year in an interview that Pemex “can achieve more, grow more and do more through alliances with the private sector”. He added: “Different mechanisms could be explored to ensure an involvement for the private sector in its alliance with Pemex . . . Brazil is one example.”
The changes are unlikely to be radical. But Mr Peña is the first Mexican president to talk openly about the need to reform Pemex and bring in foreign capital.
The potential for political change in Venezuela is unclear. But for the first time since Hugo Chávez won the presidential elections in 1998, an opposition candidate stands a good chance of defeating him. Henrique Capriles, a young left-of-centre politician, is challenging Mr Chávez for the presidential elections on October 7.
Mr Capriles, who counts the backing of all the main opposition groups, has suggested he would reform the state-owned oil company, PDVSA. Over the last 10 years, Mr Chávez has used PDVSA as a cash cow to finance Venezuela’s social and political programmes, starving the company of finances. PDVSA today pumps about 2.5m b/d, less than half what many experts believe it could.
Under Mr Chávez, Venezuela saw a U-turn in oil production. The so-called “Apertura Petrolera” programme of the 1990s – aimed at transforming PDVSA into one of the world’s largest producers – was abandoned. Apertura Petrolera was launched by Andre Sosa Pietri, PDVSA head in the early 1990s, and expanded by his successor Luis Giusti. In 1996, Mr Giusti launched a plan to double Venezuelan oil production to 6m b/d in 10 years. The target, seen as realistic by outside experts, is a reminder of the capacities of the Venezuelan oilfields, which hold large reserves of low-quality, tar-like crude.
A victory for Mr Capriles is unlikely to revive Apertura Petrolera but he will probably allow PDVSA to reinvest some of its cash flow to boost production. He is also likely to see the involvement of foreign companies in a better light than Mr Chávez, so bringing in the technology that PDVSA badly needs to develop its low-quality oil reserves in the Orinoco Belt into production.
Over the medium term, oil bulls should not regard Latin America as a support factor. The region is not a bearish influence yet. But it could become so soon.
The Commodities Note is a daily online commentary on the industry from the Financial Times
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