WITH most of the Far East already fallen to the enemy and the Caucasus and Middle East in danger, Latin America is the only important oil producing area outside the United States not yet seriously threatened by the war. Its importance is enhanced by the fact that supply lines from Latin America to the major theaters of war are shorter than those from the United States. Curaçao and Aruba -- the hugh export bases in the Dutch West Indies -- are 800 miles nearer London than are the oil ports of Texas. Close collaboration between the two Americas in supplying oil to the United Nations is therefore a vital strategic necessity.

This collaboration is imperiled by a smoldering antagonism between the various Latin American governments and the oil companies which operate in their territories.[i] No longer is the huge empire of oil autonomous in Latin America. In most countries the companies are subject to strict government control; in some of them competing state oil companies have been established; and the Bolivian and Mexican expropriations in 1936 and 1938, respectively, indicated the possibility of total expulsion. The United States Government took a hand in both of the cases of expropriation, and the conflicts were settled within a framework of broader negotiations. Nevertheless, the principle of expropriation with indemnification was upheld, and the owners of the fields were not permitted to influence the general settlements. Many Latin Americans believe that a further decline in the influence of "absentee oil capital" is inevitable. So far the movement has not made marked progress in the main producing countries of northern South America -- Venezuela, Colombia and Peru. Everywhere, however, there is growing tension. Both sides have grievances, and the political and economic interests at stake are large.

How large the stakes may be is shown by the geological surveys of the past decade. These seem to indicate that the petroleum resources of the rest of the world are much greater than those of the United States, and that the U.S.S.R. and Latin America contain the largest areas of potential oil land.[ii] Some geologists, on the other hand, believe that total Latin American reserves may not amount to more than 4 billion barrels, in comparison with about 18 billion in the United States and 5 billion in Russia.[iii] But this estimate seems far too low, especially in view of the fact that oil exploration in Latin America is only beginning. A recent geological evaluation, for instance, quoted officially by the Venezuelan Ministry of Development,[iv] states that new discoveries in that country justify the assumption of a reserve of 2 billion barrels in the eastern state of Anzoátegui alone. Promising new fields have also been discovered in the state of Monagas. The possibilities for future oil development in Colombia's Magdalena River valley, in Mexico, Cuba and Trinidad and in the Chaco region are vaguer and more problematical.

It is only within the past 30 years that the oil wealth of Latin America has been tapped. In 1910 the area supplied only 1.6 percent of total world production, which was then not more than 330 million barrels. During the next decade the Mexican oil fields were explored and developed with speculative speed. Production reached its peak in 1921, when it amounted to 193 million barrels, 25 percent of the world output. Then the production suddenly began to decline, partly because of the flooding of the Mexican Eagle fields by salt water, and Mexico quickly lost its position as the world's second largest oil producer. By 1925 the Mexican output had dropped to 115 million barrels, and in 1929 it reached the comparatively low level of 40 million barrels, where it remained, on the average, until recently. All attempts to replace the loss by new discoveries were futile except in the case of the rich Poza Rica field.

It was after the Mexican disaster that the oil companies turned their attention to South America. They found unexpected treasures in Venezuela. Within five years (1921-25) Venezuela's annual oil production rose from 1 to 20 million barrels. In 1929 it reached 137 million and in 1941 it climbed to a new peak of 223 million. There were similar hopes for Colombia in the period 1921-25, when the first wells in that country began to produce. The highest expectations, however, were not fulfilled. The Colombian output reached 20 million barrels in 1928, but was still only 22 million in 1939. The Texas Company and Socony Vacuum,which operate jointly in the Barco concession not far from Maracaibo basin, were forced to write off a loss of more than $30 million in their last balance sheets. Development was less spectacular in the other South American countries. The production curve is rising slowly in Trinidad, Ecuador and Argentina. The latter country, however, still has to import nearly 40 percent of its total consumption. Peru's production, the oldest in Latin America, falls back every year in spite of all efforts at exploration.

The main production figures for Latin America are as follows:


(in millions of barrels)
  1918 1929 1941
World Total 503 1,486 2,227
Latin American Countries 69.9 234.6 348.5
Venezuela 0.3 137 223.7
Mexico 63.8 44.7 43.8
Trinidad 2 8.7 21.2
Argentina 1.3 9 21.7
Colombia ... 20.4 24.5
Peru 2.5 13.4 11.9
Bolivia ... ... 0.2
Ecuador ... 1.4 1.5
United States 356 1,007 1,404
Russia 32.5 99.5 238

For the first half of 1942 the production figures show a sudden decline of 12.5 million barrels for Venezuela, of 2.95 million for Mexico, of 1.15 million for Colombia and of 0.2 million for Trinidad. This does not indicate approaching exhaustion. It is merely a consequence of submarine warfare in the Caribbean, since production in these countries is regulated more or less according to facilities for export.

The proportionate share of South America in world production increased from about 7 percent in 1914 to 14 percent in 1918 and, with fluctuations, to 15 percent in 1929. This proportion remained constant during the following 12 years, when world oil production was increasing rapidly.

Very little of this oil is consumed in Latin America itself. Argentina, the most highly industrialized country of the continent, has a per capita consumption of 2.2 barrels annually, compared with 8.7 barrels in the United States. In Mexico, although the growing domestic oil needs absorb 50 percent of the total production, the annual per capita consumption amounts to only 1.09 barrels. Greater consumption in Venezuela is caused by the high degree of mechanization in the oil industry itself. Consumption in the other Latin American countries is rising slowly as industrialization expands.

The low level of domestic consumption helps to make Latin America the outstanding oil exporter of the world. A total prewar production of 300 million barrels and a domestic consumption of about 100 million barrels leaves Latin America with an annual net export capacity of about 200 million barrels. This compares with United States exports of between 120 and 195 million barrels in the period between 1933 and 1938 and with exports of 160 million from the Near East and the Far East. Although the oil requirements of the Latin American countries may be expected to rise as industrialization increases, the prospects for a further enlargement of their exports remain favorable, since Latin American (and especially Venezuelan) production seems capable of further expansion. The export-import situation of the Latin American countries is shown in the following table:


(in millions of barrels)
Exports   Imports  
Venezuela 178. (mostly crude) Argentina 15 (mostly crude and fuel)
Mexico 15 Brazil 9
Trinidad 17 Uruguay 3 (mostly crude and fuel)
Colombia 19 (mostly crude) Chile 5
Peru 13 (mostly crude) Cuba 5
Ecuador 1 Other Latin American 4
  ---- ----  
  Total 243 41  

In 1938 about 25 percent of the total Latin American oil exports were shipped to the United States.[vii] Nearly one third of the remaining 75 percent was exported in 1938 to Great Britain. More than one third went to the European Continent.[viii] The rest went to other regions or was used as bunker oil.

United States imports from Latin America are mainly heavy oils from Venezuela. Since United States wells yield a rather high percentage of the more valuable light oils, United States and Latin American resources are to some extent complementary. Normally, however, Latin America is a competitor of the United States in the world oil market. Oil exports from the United States to Europe, which amounted to 61.6 million barrels in 1929, were in 1937 only 59.6 million; exports to Europe from the Dutch West Indies rose from 22.9 million in 1929 to 69.7 million in 1937.

Their rising exports of oil are of vital importance to the Latin American countries. Oil makes up 90 percent of Venezuela's total exports. In the case of Mexico and Trinidad the figures surpass 30 percent, and in the case of Colombia the figure is over 20 percent.[ix]

In addition to being an outstanding exporter of crude and fuel oil, Latin America is also a refining center. The location of the main refineries was settled by the predominant position of Venezuelan oil. Curaçao and Aruba -- small islands in the Dutch West Indies, a few miles off the Venezuelan coast -- are today the center of Latin American oil refining. This apparently peculiar location was chosen because of a lack of deep-water harbors adjacent to the Maracaibo oil fields in Venezuela and because the political situation in that country was considered uncertain under the dictatorship of Gómez. The loss of processing profits hurts Venezuela, and the oil policy of the country is now directed toward building up a domestic refining industry by attaching special conditions in new concession contracts. The historic development, however, cannot now be changed fundamentally.

Curaçao and Aruba are the largest oil-refining centers in the world. Their total crude capacity of 480,000 barrels daily tops the Iranian refinery of Abadan (280,000 barrels), the refineries near Baku (about 230,000 barrels) and the largest United States refineries at Baytown, Port Arthur, Bayonne, Baton Rouge and Whiting, each of which has a daily capacity of more than 100,000 barrels. The capacity in Aruba may soon be increased further as a result of a $10-million investment by Standard Oil of New Jersey for the production of 100-octane aviation gasoline.

The refining capacity of the other Latin American countries was last reported[x] as totaling about 450,000 barrels daily, made up of 142,000 in Mexico, 112,000 in Venezuela, 94,000 in Argentina and 80,000 in Trinidad. The total crude oil refining capacity of Latin America is, therefore, roughly 940,000 barrels a day. This compares with 4,927,000 barrels in the United States(1941) and a world total of about 8 million barrels (with no allowance for war damages). Producing 15 percent of the world's oil, Latin America has 12 percent of its total crude refining capacity.

Turning from the production, distribution and processing of Latin American oil to its financing, we find that investments in the industry fall into three categories. First, there are the investments of foreign capital. The investments made by the United States in Latin American oil -- including production, refining and distribution -- were estimated in 1936 [xi] at $559 million, or 17 percent of the total of direct investments on the continent; by now they may well exceed $600 million. The British are estimated to have invested about half as much. Thus the total private, direct investments of foreign capital in Latin American oil can be estimated at about $900 million.[xii] Of the total, $400 million is invested in Venezuela [xiii] (62 percent American, 38 percent British) and about $90 million in the refineries of Curaçao and Aruba.

The second type of capital is that invested by the Latin American governments. The chief government properties are in Argentina and Mexico. The capital of Argentina's state oil company, Yacimientos Petroliferos Fiscales (Y.P.F.), amounts to the high figure of 474 million pesos; but that company has an annual output of only 14 million barrels as compared with the 43-million-barrel production of the Mexican enterprises.[xiv]

Finally, there are the direct investments of private Latin American capital. These, however, are insignificant. Domestic investments in Mexico were estimated in 1938 at 2.5 percent of all oil investments in that country.

In summary, a total of about $1.1 billion is invested in the Latin American oil business. Eighty-five percent of this is foreign capital, and most of the remainder is owned by Latin American governments.

Among the foreign companies with investments in Latin American oil the Standard Oil Company of New Jersey and Royal Dutch Shell are predominant. In Venezuela, for example, production is distributed as follows: Standard of New Jersey, 50.85 percent; Royal Dutch Shell, 38.35 percent; Gulf Oil (Mene Grande), 10.30 percent;[xv] miscellaneous, .50 percent. The main production of Colombia and Peru is controlled by Standard of New Jersey. Shell has concessions in Trinidad, Colombia and Ecuador.

Latin American oil regions are, indeed, the main sources of supply for these companies. In 1938 the Standard Oil Company of New Jersey and its subsidiaries produced 240 million barrels of oil. If we include 80 million barrels purchased from other producers by the Humble Oil Company -- one of the Standard subsidiaries -- we see that Latin America provided 45 percent of this total. The Latin American share of the total supply of Royal Dutch Shell is only slightly smaller. Venezuela, Trinidad and Argentina supplied 85 million barrels of the total of 210 million in 1938, Venezuela alone supplying 78 million. At the present time Latin America, primarily Venezuela, provides more than 60 percent of the total Shell supply.

Other oil companies interested in Latin American oil are Socony Vacuum and Sinclair in Venezuela; Texas and Socony Vacuum jointly in Colombia; Standard of California in Colombia and Venezuela; and Atlantic Refining in Cuba and Haiti. The production of fields controlled by these companies, however, has been insignificant thus far compared with that of Standard of New Jersey and Shell.

In spite of occasional losses and setbacks, the investments of these companies in the Latin American oil business have, on the whole, proved highly profitable. Earnings have been large enough to cover any risk involved. The average costs of crude production per barrel, including deliveries to the Atlantic coast market, were officially calculated in 1932 as $1.90 for the United States, $1.60 for Colombia, Peru, Ecuador, Trinidad and eastern Venezuela, $1.41 for Mexico's heavy oil, and 87 cents for Lake Maracaibo.[xvi] Venezuelan production costs, excluding transport but including royalties, etc., were calculated for 1928-30 at between 49 and 54 cents; today they may hardly exceed 40 cents in view of the considerable increase in production. The export value of Venezuelan oil, on the other hand, was established jointly by the companies and the Government at 82 cents per barrel for 1938; 18.5 percent of this value represents payments to the Government.[xvii] Total oil profits in Venezuela, therefore, exceed $60 million, or 15 percent on the invested capital. This estimate may be conservative in view of the present peak production. One Standard subsidiary alone, the Venezuelan Lago Petroleum Company, with total assets of $100 million, was estimated to have yielded $21 million net profit in 1938.[xviii] These earnings are tax free and the oil companies pay relatively low royalties, in some cases not higher than 10 percent. In Colombia, where drilling and transportation conditions are far more unfavorable than in Venezuela, the total levies on the oil companies amount to 39 cents per barrel, of which 22 cents represents direct taxation.[xix]

The profits of the oil companies in Latin America, particularly in Venezuela, compare strikingly with the 6 percent return on the total direct American investments in Latin America and the 1.4 percent return on portfolio investments. They have more than compensated the companies, not only for their losses in Mexico and Bolivia, but for the risks caused by increasing government intervention in the other Latin American countries.

The intervention of Latin American governments in the oil business is not primarily, as is often said, the expression of a shortsighted, nationalistic policy designed to favor domestic groups working against foreign capital in Latin America and capitalism in general. Rather it is the result of a widespread feeling in Latin America that "absentee capital" is not sufficiently interested in furthering local interests and that the profits of the oil companies ought to be used to a greater degree for the development of the respective domestic economies. The companies are suspected -- sometimes with justification, sometimes without -- of not investing as much money and energy in exploration, production and the refining business as the interests of the countries require. The companies, on the other hand, complain that in spite of their valuable developmental work, their property is not protected against expropriation and other state intervention. These divergent viewpoints have given rise to deep-rooted misunderstandings which hamper friendly coöperation.

In both Bolivia and Mexico, domestic dissatisfaction with the amount of exploration and production was one of the underlying reasons for expropriation. The Brazilian decree of May 12, 1940, which placed the entire oil business under the control of a National Petroleum Council, had as its purpose not only to achieve import and price control but also to increase exploration, which seemed too expensive and risky to the private companies, but which was urgent from the national standpoint. Six years of steadily declining production recently led the Peruvian Government to undertake exploration, refining and distribution in the Zorritos region. Colombia, whose output remains nearly constant in spite of the existence of allegedly rich reserves, has given notice to the Tropical Oil Company (Standard of New Jersey) that the De Mares concession will be terminated in 1946 in order to increase state control and enlarge exploration and production.

The situation is somewhat different in Argentina. Oil deposits were first discovered in that country in 1907 by the Government Bureau of Mines. The oil companies did not begin to operate in Argentina until after 1916, when the Commodoro Rivadavia field was already producing; as late as 1925 their production was not more than 25 percent of the country's total output. Consumption increased constantly, and Argentina now is the fourth largest per capita user of oil in the world (33 million barrels in 1941). Today, an adequate supply of moderately-priced oil has become a vital necessity for further industrialization in view of Argentina's lack of domestic coal mines. So-called "nationalistic" tendencies have increased with the need for oil. The state oil company, Y.P.F., controls all national reserves, more than 60 percent of the total production and more than 50 percent of the refineries, and holds a leading position in a kind of compulsory cartel which supervises imports, prices and distribution. The foreign companies have not been eliminated, but they are sharply controlled and their interest in Argentina is cooling. The Argentine-Bolivian agreement of April 4, 1940, was in line with the Argentine oil policy. By it Argentina will finance and carry out a new transportation program in the oil-bearing Chaco region. Argentina also proposes to become independent of foreign transportation and freight charges by expanding the Argentine tanker fleet, which in 1938 had a capacity of only 84,000 tons.[xx]

As a part of its general public utility policy, Uruguay provided in 1931 for a government monopoly in alcohol, combustibles and cement and established its own oil refining industry. Chile's Companía de Petroleo de Chile (Copec) was established in 1934, after the nitrate crisis, as part of a general program of economic and financial reforms. This is an import and distribution company, not government-owned but favored by the Government in such matters as exchange rates, the erection of retail outlets and freight rates.

In Venezuela, the divergence between the oil policies of the state and the desires of the companies has been covered in recent years under the fallacious appearance of prosperity. Governments hardly ever interfere in the oil business during periods of real prosperity. But in spite of Venezuela's great wealth of oil and the high rate of crude oil production, the economic condition of the country is basically unsound. Agriculture and industry, with the exception of oil, are cómpletely undeveloped. More than 80 percent of the population of 3.5 million is very poor and conditions of health and education are primitive. The budget, however, which amounts to more than 300 million bolivares, is one of the highest in Latin America. Not more than one third of the state income of Venezuela is derived from royalties and other oil payments. The rest comes mainly from tariffs which increase import prices by an average of 70 percent. Cotton fabrics pay a duty of 90-185 percent of original cost and the duties on foods averaged 113 percent in 1937.

All this makes living costs in Venezuela the highest in the world. Furthermore, the bolivar was kept on the gold standard even after the devaluation of the dollar. Direct taxation of the oil industry is barred, according to the oil companies' interpretation of their contracts. Recommendations for fundamental changes in the economic system, worked out by various experts, have not yet had practical effect. A small income tax which was recently introduced seems not to affect the oil companies. The emergency agreement of July 1942 providing agricultural occupation for dismissed oil workers is not a major reform measure. Nor will the new Export-Import Bank loan of $20 million be more than temporarily helpful if it is not followed by a complete reorganization of the Venezuelan economy including, primarily, radical monetary, tax and tariff reforms and control of public utilities. The increased output of oil in Venezuela in 1941 -- the outlook for 1942 is less favorable -- brought additional income from royalties and somewhat alleviated the situation. But if a reform of the Venezuelan economy is not undertaken in time the oil companies may face, sooner or later, the same antagonism with which they found they were unable to cope successfully in other Latin American countries.

Thus we return to the point at which we began. The oil companies and many Latin American governments have reached an impasse. Only new forms, such as mixed companies, etc., and a new spirit of collaboration can help to overcome it. Oil is too important a factor in war and peace and especially in hemisphere relations to be neglected in the framing of a Good Neighbor policy.

Concessions by both sides are necessary. The two requisites seem to be greater security for additional oil investments in Latin America on the one hand, and a deeper understanding of the general needs of the Latin American oil exporting and importing countries on the other. It will be the task of farseeing statesmanship in Washington to find the means to reach this solution.

A foundation was laid when an international South American Petroleum Institute was organized in Montevideo in 1941 with a membership including governments, private companies and oil experts. It will set up a permanent international council and further the exchange of technical and economic experience in oil among the South American republics. If the Institute could inaugurate a well-balanced oil policy, covering not only the domestic problems of the South American countries, but also their relations with the United States Government, and if the oil companies should show a willingness to understand the real needs of Latin America, an important step would have been taken toward the realization of a practical Good Neighbor policy as regards one of the most fundamental raw materials.

[i] Cf. D. M. Phelps, "Petroleum Regulation in South America," American Economic Review, March 1939, p. 48-59.

[ii] Oil and Gas Journal, Dec. 25, 1941, p. 81.

[iii] Estimate of Jan. 1, 1939. Cf. "Petroleum Facts and Figures, 1939," p. 60.

[iv] "Informe del Ministerio de Fomento de Venezuela," March 28, 1940, p. 3.

[v] Oil Weekly, May 12, 1941, p. 125; and July 27, 1942, p. 118.

[vi] The central refinery system of Latin America is located in the Dutch West Indies, where South American oil of various origins and qualities is mixed, together with some gasoline imported from the United States. This makes it impossible to trace separately the oil exports and imports of the various countries. The complications caused by this fact are disregarded in this table.

[vii] "Memoria del Ministerio de Fomento de Venezuela, 1941," Introduction, p. xlvii.

[viii] In 1938, 45.1 percent of total German imports came from Venezuela and the Dutch West Indies.

[ix] Nearly 70 percent of the oil imported by Latin American countries comes from Latin American sources, especially from the Dutch West Indies and Peru; more than 30 percent, however, comes from the United States. South America imports about 14 million barrels of United States oil, exclusive of the Dutch West Indies imports used for mixing purposes.

[x] Oil and Gas Journal, December 25, 1941, p. 107.

[xi] Cleona Lewis, "America's Stake in International Investments." Washington: The Brookings Institution, 1938, p. 188, 588.

[xii] This figure does not include investments in the expropriated oil properties in Mexico, for which a total indemnity of between $70 and $80 million may finally be paid.

[xiii] Cf. Revista del Ministerio de Hacienda, 1936, p. 45; Revista del Ministerio de Fomento, 1937, p. 134; and ibid, 1939, p. 184. The Venezuelan estimates vary between $320 and $360 million, excluding refineries and distribution organization.

[xiv] Complete figures on the oil activity of Latin American governments are not available.

[xv] Originally Mene Grande's share was larger, but a recent pool agreement gave the other two companies half of the Mene Grande production for a payment of $100 million.

[xvi] "Average Production Costs of Crude Petroleum," 72nd Congress, House Document No. 194.

[xvii] "Memoria del Ministerio de Fomento de Venezuela, 1940," Introduction, p. xix.

[xviii] Lago does not publish its balance sheets; but cf. "Standard Oil Co. (N. J.)," III, Fortune, June 1940, p. 107. Mexico estimates the average yearly oil profits before 1938 at 17 percent.

[xix] World Petroleum, September 1941, p. 33.

[xx] Similar tendencies can be observed in Brazil, which has a tanker fleet of 40,000 tons capacity.

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  • FREDERICK HAUSSMANN, for many years a director of Deutsche Erdoel A. G.; later adviser to the Venezuelan Government on oil matters; now lecturer at the New School for Social Research, New York.
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