Latin America's Risky Bet on Pricey Oil
Falling global oil prices are wreaking havoc on Latin America far beyond the economic mess in Venezuela. True, the near-60-percent drop in the price of a barrel of oil since June 2014 has compounded Venezuela’s problems—hyperinflation and deteriorating finances—that resulted from decades of mismanagement. But other countries with more prudent economic policies, including Brazil and Mexico, are also feeling the pinch.
For different reasons and in different ways, all three Latin American countries have bet big on high oil prices. Now they must deal with the consequences—and at a time when elected leaders across the region are already facing a series of popular political challenges. Whether it’s addressing a scandal within the state oil company (Brazil), delivering the benefits of painful economic and political reforms (Mexico), or grappling with the economic chaos created by profligacy and corruption (Venezuela), the year of low oil prices will be a tough one for some of the largest economies in the region.
BRAZIL: RUNNING ON EMPTY
For a while, the 2007 discovery of Brazil’s offshore pré-sal oil deposits—so named because they lie under a hard salt cone off the coast of Rio de Janeiro—was a symbol of the success of Brazil’s national energy company, Petrobras, and the country’s bright future. The fields were estimated to hold at least 50 million barrels of oil. So exciting and promising was the discovery that then President Ignácio Lula da Silva traveled to the rigs to welcome the first spurt of crude oil that came from the reserves, calling the find a “winning lottery ticket.”
Privatized under the administration of former President Fernando Henrique Cardoso, Petrobras retains a monopoly on Brazil’s energy sector. The energy behemoth accounts for 90 percent of the oil produced in the country, controls most of the retail gas distribution, and dominates everything in between. Although Petrobras is listed on the Brazilian stock market, the government retains a majority stake in the company, and the president appointsRead the full article on ForeignAffairs.com