Drug trafficking may determine
US/Latin American oil relations

Latin American oil producers can expect a larger share of North American and world oil markets in the second half of this decade as the world's political emphasis moves away from the cold war and more towards economic development. According to Dr Gary Ross, Chief Executive of the US based energy firm, PIRA Energy Group, with the decline of the Russian Communist system, US foreign policy concerns have turned away from the bi- polar world to one where new issues like drugs and intellectual property are becoming key issues.

Speaking to delegates at the Association of Latin American Oil Companies' 31st Ordinary Assembly (ARPEL) at the Trinidad Hilton in late May, Ross said that despite projections for weaker oil prices, political factors will allow for a closer relationship between the world's single largest market and exporter of oil (the USA) and Latin America. The relationship will be based on sheer economics he said, but there is the potential of the new political issues to affect trade.

"From an economic point of view, the US market is on Latin America's doorstep, and the increasing levels of efficiencies in production and exploration is making the oil business more profitable for regional producers."
"In Latin America, a major concern to the Americans is the drug trade and money laundering.The US State Department has listed five Latin American oil producers as being 'drug countries,' either involved in money laundering or the production and trafficking of drugs. The State Department has even taken the strong step of decertifying Columbia on March 1, 1996.

"It is potentially a hot issue in Congress which could become even more important as the decade progresses. As such it can potentially interfere with the economic role that Latin American oil exports will play in the US market. Apart from the impact on trade, decertification leads to 'minor encumbrances' on loan organizations in their lending to Columbian industry as well as reducing US foreign assistance." Focusing on trends affecting the oil industry to the end of the century, Ross said that world oil demand is expected to grow by 2.7 percent per year.

"That's a substantial growth compared to the 1.1 percent per year recorded from 1990 to 1995. The Asian market would contribute some 40 percent of the demand growth. Latin America is expected to grow by about 1.2 mbd (million barrels per day), that will be close to 3.5 percent per annum growth. This is substantially higher than the first half of the decade and higher than the average for the rest of the world. So we will see a slight increase in Latin America's share of world oil demand." The highest level of demand growth will continue to be for middle distillates.

Gasoline demand will grow but not as rapidly, largely because of the rather sluggish growth in the US market. This is principally due to demographics. Heavy fuel oil will continue to be plagued by competition from coal and natural gas and that will tend to undermine its growth prospects. "Despite all this development, the real excitement is on the supply side. The economic rent (the difference between price and cost) of producing oil and gas, has blown out to provide the producer with a tremendous economic incentive, even higher than the aftermath of the Gulf War.

"The reason is reductions in the cost of production. Pick up the annual report of any major oil of gas producer and in the first three pages you will hear how they have dramatically reduced the cost of production. Reduction costs and finding costs have come down dramatically and are expected to fall even further. This has created a tremendous incentive to invest in Exploration and Production and this is why there is such great interest around the world, especially in Latin America. Given privatization in Mexico, Columbia, Venezuela and Trinidad, companies are very, very eager to spend money in an incredible economic environment where they can make even more money.

"Every individual company looks at projections for the next five years and sees a pot of gold. Given the new technical advances occurring in exploration and production, Europe experiences recovery rates of up to 60 percent, that is from original rates of 35 percent in the 1980's. Increased demand as well as supply would be coming from Latin America, but in all these countries except Brazil, supply will outstrip demand and the natural market for this excess will be the United States.

"In the US, refineries are already running at over 90 percent capacity, and not much in the way of new capacity is expected to come online with the exception of 'capacity creep.' US markets however is not expected to be as dynamic as the Latin American markets, but the excess production from, Latin America will find its way to the US and it will put pressure on other foreign sources of supply, particularly, West Africa and the Middle East. "From a foreign policy and strategic point of view will Saudi Arabia allow this natural decline to continue and allow its dependence on the US market to fall? Or will it focus on markets nearer at hand which are growing rapidly?"

On the other hand, for the five Latin American countries which have been targeted as being in the drug trade, particularly an oil producer like Colombia, the US market may be closed. "Clearly this has become somewhat of a more important issue and poses some risk to oil exporters because the process is such that the President first of all has to certify these countries that are listed by the State Department and then, of course, if the President decertifies them, they would continue to monitor whether these countries are making progress in combating drugs.

If not, the threat of economic sanctions is real. So far eleven countries have been listed as having "drug related problems," says Ross, seven of these countries are significant oil producers, and five are in Latin America. These are Brazil, Equador, Mexico, Venezuela and Colombia.

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