For more than a century, Latin America has been an essential part of the global petroleum market. It fueled the Allied powers during World War II and served as a reliable source of oil to the growing economies of the now-industrialized world. It served as a laboratory for oil governance structures, as a testing ground for technology, and as a stage for discussions on resource ownership. Today, it continues debating, changing, and developing. Broadly, these debates have resulted in a shift away from state-imposed to market-required rules.
In the past two decades, countries in the region have begun allowing their state-owned oil companies more operational independence and have set clearer rules for non-public investment in the petroleum sector. This shift began in Peru towards the early 1990s and continued in Brazil by the end of that decade. Colombia made similar reforms in the early 2000s and Mexico joined the trend in 2013. The new landscape allows for far more competitiveness, transparency, and efficiency and it has the potential to yield better and stronger benefits to Latin Americans.
This fundamental change in the Latin American oil market, of course, is now facing an immense challenge: a fundamental change in the global oil market itself. Rough estimates show that the value of Latin American oil production in 2016 was US$155 billion – higher than Ecuador’s gross domestic product (US$100 billion) and slightly lower than Peru’s (US$189 billion). Yet, only 3 years ago, this figure was US$369 billion. This decline is explained by two factors.
The first is the collapse in oil prices from US$100 per barrel in mid-2014 to a nadir of US$30 per barrel in February 2016. Current prices are 50% lower than their average between 2011 and 2014. This has yielded much lower revenues for the region’s petroleum exporters. For Venezuela, for example, oil export revenues have fallen by around 70% from their peak in 2008. Between 2006 and 2016, oil export revenues in Mexico dropped from US$47 to US$8 billion – a full 91%. Ecuador’s figures dropped 65% from their peak in 2008 while Colombia’s decline reached 31% from 2013. The second factor is the steady drop in regional oil production over the last decade. Since 2005, regional production has fallen from 10.9 to 9.9 million barrels per day.
This decline is taking place at the same time as the global oil market undergoes a deep transformation from a model dominated by supply-side monopolies to one where competition establishes the rules of the system. The entry into the global oil market of non-conventional crudes from the US that are produced in a competitive environment has transformed the way in which prices are set. Indeed, a pricing mechanism based on competition, a novelty for oil economics, is being established as the market is using the marginal cost of marginal producers as an equilibrium price, thus eliminating monopoly profits for lower-cost producers permitted by the previous system.
Latin American oil producers must adapt to this new environment by first understanding that it is not a passing fad but a permanent new feature of the market. It is rare that a globalized market moves from a monopolistic to a competitive structure because the price setting capacity gets diluted into many actors and not one participant has price setting power. It is then possible to design frameworks that deepen the sector-freeing reforms of the past two decades and that keep the sector up to date with latest industry developments.