The Good News Behind High Oil Prices
By Alan Stoga*

The headlines are getting worse every day. While the causes rotate — political instability in the Middle East, a threatened war in Nigeria, continued fighting in Iraq, President Putin's assault on Yukos, hurricanes in the Gulf of Mexico — the result is the same: high oil prices threatening to go higher.

However, these are more symptoms than causes. Years of stable oil prices discouraged investment in new exploration, reduced the urgency of investing in new infrastructure — pipelines, refineries, LNG trains, ports and ships — and allowed governments to backslide on creating and sustaining conditions that would allow oil companies, including national oil companies, to expand energy supplies. Thus, when the international economy finally started to grow, energy markets quickly tightened and became vulnerable to the kinds of problems that plague too many oil producing countries. Even if some of the surge to $50 per barrel was caused by speculators, there is little doubt that underlying demand and supply factors bear most of the blame.

We can probably live with fifty dollar oil, but what if prices continue to rise? At what price will the world economy hit a tipping point? Which accident in which oil producing country will be one accident too many? Have we entered a situation where will prices go down only when there is another global recession?

The good news is that the world is not running out of hydrocarbons. The better news is that a lot of those reserves are located outside the Middle East and Africa, here in the Americas.

The little known fact is that Latin America, including Mexico, is blessed with massive, largely untapped energy reserves. Proven oil reserves are on the order of 118 billion barrels, second only to the Middle East, while gas reserves are almost 270 trillion cubic feet. This represents roughly 12% of known global hydrocarbons, with good reason to believe that the potential is considerably greater. Today production is only 3.3% of proven reserves, compared to Canada's 15% production-reserves ratio and the United States' 9%. Clearly, the tremendous reservoir of reserves in Latin America could support much larger production.

Indeed, on some estimates, the region — which today produces 10.5 million barrels per day and exports half of that — could produce 19 million per day by 2020. Of course, such dramatic production increases would require equally dramatic investment increases: new investment of around $8 billion per year, well into the next decade, would be needed in order to double production.

But money is not the problem; oil companies routinely invest billions in much higher risk geography than Latin America. The private sector energy companies have demonstrated their enthusiasm to invest in Latin America, including even in Cuba. And the capital markets have not hesitated to provide massive amounts of capital to government owned oil companies in Venezuela, Mexico, and elsewhere.

The real problem is finding the political will to create and sustain the conditions that will allow oil companies — whether owned by governments or by private shareholders — to find, develop, produce, and market the region's hydrocarbon riches.

Unfortunately, on this score Latin America's track record is not good, and may be getting worse. Venezuela's recent announcement of a 16 fold increase in royalties on four projects in the Orinoco, Bolivia's discussion of dramatic tax increases on existing production activities, and Ecuador's rejection of proposals to allow private investment in the oil sector are the kinds of things that lead to less, rather than more exploration and production.

The reality in the hemisphere is that countries with state-owned oil companies too often run those companies to maximize patronage instead of reserve and production growth. And some of the countries that are open to private sector investment do not offer sufficient contract security, internationally competitive returns, or a predictable regulatory environment.

Turning this situation around is in everyone's interest, consumers as well as producers, countries already producing substantial hydrocarbons and those whose energy wealth is still largely unexploited. This is the time to use the reality of spiraling oil prices — which is a threat to some and an opportunity for others — to create a hemisphere-wide dialogue, involving both the public and private sectors, about the energy future of the Americas. The goal should not be to nationalize private resources or to privatize public resources, but to define the conditions which are needed to explore and produce the oil and gas reserves that obviously exist in the region.

Undoubtedly, no one would like all of the answers that would emerge from such a conversation. All sides will have to make some compromises in order to mobilize the capital, technology, and infrastructure that will be needed to assure that energy contributes to, instead of threatens, the region's prosperity.

No problem is more important. At least for Latin America — with all those barrels of oil and gas waiting to be pumped — no problem is more solvable.

*Alan Stoga is president, Zemi Communications.