A Natural Gas Disaster
by Alvaro Vargas Llosa
BUENOS AIRES, Argentina — Few things better illustrate the tragedy of Latin American populist and nationalist politics than the crisis related to natural gas in South America. A region endowed with vast reserves and governments that describe themselves as close partners is mired in crippling power shortages and cross-border disputes over cutbacks in the supply of natural gas. People cannot count on consistent service.
The problem began in 2002 when Argentine politicians decided to control the price of natural gas, large amounts of which had been discovered in the country during the previous two decades. In the context of an economic rebound, demand boomed. Natural gas became a crucial part of Argentina’s energy mix—the automobile industry here largely converted to it as a fuel source. But because the controlled prices provided little incentive to foreign companies at a time when the government was leading an aggressive campaign against private capital, investment dried up. When supply was unable to meet demand, shortages followed. Argentina was forced to reduce contracted exports to Chile from 20 million cubic meters a day in 2003 to one-tenth of that today. Chileans, whose solid economy depends heavily on energy imports, felt betrayed by their next-door neighbor even though both left-wing governments called themselves allies. The cutback in exports to Chile was not enough to solve the problem in Argentina, which ended up importing other fuels that were more expensive and less clean than natural gas.
In Bolivia, private capital made possible the discovery of big natural gas reserves in the 1990s—potentially 52 trillion cubic feet. As an opposition leader at the time, current President Evo Morales led a movement against private investment in the country’s energy sector. When he became president, he nationalized the industry. Morales backtracked when it became apparent that the government was unable to exploit the country’s natural resources, but the overall effect of his earlier action has been the drying up of much of the private investment. Export commitments to Brazil, many of whose states, including Sao Paulo, depend significantly on Bolivian energy, and to Argentina were affected. Bolivia cut its exports to Argentina by one-third and tripled prices. Tensions between the two left-wing governments soon flared.
Two decades ago, Peru discovered important natural gas reserves in the Amazon area—today these reserves are believed to be about 13 trillion cubic feet—enough to provide the domestic market and exports for decades. Because the government and much of the opposition demonized foreign investment, the exploitation of those reserves began only a few years ago. All this time, Peru wasted resources importing more expensive energy. Natural gas started to feed the domestic energy market only recently. Once an expensive plant is constructed to liquefy the gas, Peru will be able to ship the fuel to Mexico. However, it would be easier and less costly to export it to Chile, Peru’s next-door neighbor—except that historical grievances arising from the War of the Pacific in the 19th century have made it politically impossible for the government of Peruvian President Alan Garcia to consider such a possibility.
Venezuela has the largest natural gas reserves in South America, yet they have not been exploited significantly because of the government’s obsessive concentration on oil. This has been to the detriment of the Latin American countries whose governments have become subservient to Caracas for reasons that are not just ideological but also practical: Subsidized Venezuelan oil helps offset the energy deficit that will continue to haunt these countries for years. However, because the oil industry is in inefficient and corrupt government hands and used as a political tool by strongman Hugo Chavez, production has dropped well below 3 million barrels a day. At some point, Venezuela will be forced to renege on its commitments to supply oil to South and Central American as well as to Caribbean countries.
This absurd situation—a continent awash in natural gas and yet trapped in a chronic energy crisis—is the result of policies that promised to protect national treasures from predatory foreign capitalism. The region is poorer than it would have been if the political and institutional framework under which natural gas is exploited were conducive to competitive private investment and free domestic and international trade. And it is also less integrated and stable than it would have been if a market free from demagoguery had been allowed to blossom. Populism and nationalism have had the exact effect on Latin Americans that nationalizations, price controls and predatory taxation were supposed to avert.
http://www.independent.org/newsroom/article.asp?id=2147
Alvaro Vargas Llosa
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Alvaro Vargas Llosa is Senior Fellow and Director of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. He is widely published and has lectured on world economic and political issues including at the Mont Pelerin Society, Naumann Foundation (Germany), FAES Foundation (Spain), Brazilian Institute of Business Studies, Fundación Libertad (Argentina), CEDICE Foundation (Venezuela), Florida International University, and the Ecuadorian Chamber of Commerce. He is the author of the Independent Institute books The Che Guevara Myth and Liberty for Latin America.
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