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The Energy Situation in the Western Hemisphere

Wednesday, July 11, 2007

Sidney Weintraub, an economist and Latin America specialist with the Center for Strategic and International Studies concludes in a new article in Foreign Affairs en Espanol that lack of cooperation on energy comes at a very high cost for Western Hemisphere countries. This cost is felt most acutely in South America, were the integration of energy markets and other cooperation between countries to make the most efficient use of the region's resources is even greater than in North America. Weintraub writes:

Several U.S. presidents have proclaimed the goal of energy independence, but refuse to mandate high fuel efficiency standards. President Chavez announces a project to build a mega-pipeline from Venezuela to Argentina, and the announcement may well be the real objective because no action has been taken to carry it out. Mexican authorities now agree they must explore in the promising deep waters of the Gulf of Mexico, but so far have done next to nothing to make this a reality. The hemisphere has no more been able to integrate energy policy than it has trade policy—and each of these failures comes at a high cost.

An English translation of the article (pdf file) is available on the CSIS Web site. Its great value for researchers will be its country-by-country summary of the energy situation in the region.

Brazil-U.S. cooperation on ethanol, Venezuelan oil sector nationalization and other such issues have been in the news lately, but there is much going on in Western Hemisphere energy that doesn't get a lot of attention.

To take one example, Weintraub explains the consequences of Mexico's nationalistic energy policy, where private-sector energy investment is prohibited by the country's constitution. In addition, the Mexican government has been heavily drawing on state-run oil company Pemex's revenue to finance spending. The result: declining oil production and a lack of money for new exploration.

As Jonathan Roeder pointed out in a July 10 article for WPR, this energy quandary is one of the many problems Mexican President Felipe Calderon's program of fiscal reform is meant to address. Here's what Roeder wrote:

For decades, Mexico has been able to put off tax reform by milking Pemex, the state-owned oil monopoly. Close to 40 percent of federal funding comes from taxes on oil, but this heavy burden has left Pemex unable to invest in exploration and infrastructure. Mexico's constitution also prohibits private investment in the energy sector, limiting the firm's possibilities.

As a result, oil wells are running dry and production is dropping. If current trends continue, Mexico, today a major supplier of the United States, may become a net oil importer within a decade, according to experts.

"Right now you're already seeing that oil production is starting to fall," said Jonathan Heath, chief economist for HSBC Mexico. "And it's starting to fall . . . because necessary exploration and investments haven't been carried out."

If other sources of revenue are not found -- and quickly -- the nation could face financial crisis.

The good news is that Mexico's leader is attempting to implement sensible solutions for the country's fiscal and energy woes. As the Weintraub article makes clear, however, the governments of many other Western Hemisphere countries are not just failing to address costly energy inefficiencies, but making them worse by following ill-advised energy and economic policies.

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