With the death of King Fahd of Saudi Arabia, the price of crude oil reached a record high of $62.10 a barrel on August 1, according to the West Texas Intermediate (WTI) reference price. Saudi Arabia is the country that has the greatest oil reserves on the planet. When that Arab country sneezes, the rest of the world catches a cold. Given the possibility of a decline in oil supplies in coming years, the world’s most powerful oil-consuming countries must depend on the ups and downs of global markets. Those countries are concerned that Venezuela, which has 68% of the gas reserves of South America and 57% of Latin America and Caribbean reserves, is promoting a series of coalitions with the other regions.


Three New Coalitions


Earlier this year Venezuelan president Hugo Chávez managed to create three new regional agreements known as Petrocaribe, Petrosur and Petroandina. They all have the ultimate goal of bringing together a series of economic, political and social initiatives within Latin America. The first group, known as Petrocaribe, comprises Venezuelaand 14 Caribbeancountries. The second, Petrosur, brings together Venezuela, Brazil, Uruguayand Argentina. The third, Petroandina, comprises Venezuela, Colombia, Boliviaand Ecuador. All three associations were created during the first months of this year. The ultimate goal for the future is to create Petroamerica, a coalition of state-owned oil companies that would cover all of South America. In theory, this approach would help solve the supply problems of the region.


Several questions remain. Is this approach to integration really viable? What are Venezuelan President Chávez’s hidden political goals? Can Petrosur, Petrocaribe and Petroandina compete with the world’s other cartels, including the Organization of Petroleum Exporting Countries (OPEC)?


For the time being, analysts suggest, these agreements will respond more to political pressures than to economic forces. According to Santiago Palma Cané, a consultant in international markets, “This type of association can be viable from the political point of view because, for example, the four presidents involved in Petrosur (Hugo Chávez, Lula da Silva, Tabaré Vázquez, and Néstor Kirchner) are in agreement when it comes to their ideology concerning the role of the state in managing the economy, and the chances of using Latin American integration as a platform for promoting alternative strategies for progress.”


Juan Battaleme, professor of international relations at the University of Buenos Aires (UBA), agrees. “Because the presidents of the region have undertaken a process of political integration, these organizations make sense,” Battaleme says. “The agreements provide a tangible framework for forcefully expressing Brasilia’s political interests, much the same way that the Central American Free Trade Agreement (CAFTA), recently approved” by the U.S. Congress, does for the U.S.


The Latin American petroleum blocs have generated concern in the big oil and gas consuming countries of the region, especially in the U.S. However, Battaleme says, “Even if you exaggerate the antagonism with the United States, Petrosur and Petrocaribe are not a menace because all the players, including Chávez, are trying to have a stable relationship with the U.S. and provide the resources that it needs.”


In fact, Venezuela is one of the main providers of oil to the United States, the country that consumes about one-quarter of global crude production. From Palma’s point of view, “Any project of Chávez that endangers that supply is worrisome” to the United States. “As long as Chávez continues in power, crude oil will be a constant challenge for the United States because the Venezuelan leader bases some of his power on anti-liberal, populist rhetoric against the U.S.


There is a longstanding rivalry between Chávez and U.S. President George Bush for control of the Americas. Oddly, however, the popularity of both leaders has declined in recent months. According to Alfredo Keller and Associates, a Venezuelan consulting firm, Chávez’s approval rating fell 14 points during the last quarter, down to 61%. During the same period, 50% of Americans expressed disapproval of George Bush’s leadership in a Gallup Poll. It was his largest drop in popularity.

If Ch
ávez is the driving force behind these projects, Brazilian President Lula is undeniably the other leader in Latin America, despite his current problems with corruption. “Petrosur is a far-reaching political plan that would improve [Latin America’s] negotiating position with other players,” says Battaleme. “It would strengthen the Lula-Chávez axis as a center of control in the region, and lead the United States to reexamine its policy, at least to some extent. At the same time, Brazil would not allow itself a high level of antagonism against the United States, because Brazil aspires to be considered a partner in leading the region. Meanwhile, Argentina and Uruguay hope to have a relationship [with the U.S.] that involves as little friction as possible.”


For their part, private-sector oil companies that have invested in the region should not be too concerned about the creation of Petrosur and Petrocaribe. According to Battaleme, “These blocs pose a problem for them in ‘national’ terms because Petrosur is going to present itself as a national option, as opposed to foreign investors who [allegedly] think only in terms of their profitability. Governments can employ rhetoric that favors Petrosur. However, when it comes to quantity and quality, private-sector firms can not only adapt to the challenge, but also come out on top. That’s because experience shows that public-sector companies have always had serious problems when it comes to being economically viable. Moreover, in this sort of organization, you have to coordinate the plans and ideas of four countries, so paralysis can occur frequently.”


Advantages and Inconveniences


So far, the three Latin American blocs have merely signed letters of intention. Their economic, social and political plans are ambitious, however. The new energy consortiums would look for appropriate means for production and trading in energy products, and for carrying out public works projects such as the construction of an oil pipeline connecting the Caribbeancoast of Colombiawith its Pacific coast. It would enable exports to China, Japanand India. Another project would involve the construction of a gas pipeline between Colombiaand Venezuela.


Another topic of discussion has been the possibility of uniting the three strongest state-run energy companies in South America   — PDVSA (Venezuela), Petrobras (Brazil), and Enarsa (Argentina).


Last June, during the Mercosur Summit in Asunción, participants also discussed the creation of a South American “energy cone” — a network of gas pipelines and electric networks to cover the basic needs of the countries in the region. All of these projects would have the common goal of creating an energy ring that would bring gas from the Camisea field in Peru down to Chile, Argentina, Brazil and Uruguay. From there, everything would have to be connected with the Northern part of Latin America, which comprises the Petrocaribe bloc.


Beyond that, there are social aspects to these pacts. For example, in Petrocaribe, the 14 member-nations have agreed to create a fund, known as ALBA-Caribe, to contribute to the social development of the region. In addition, the leaders of Petrosur have signed an agreement to create a television channel for the region. The new network, known as Telesur, began broadcasting last July. The new Latin American channel is an initiative of Chávez, and it has already raised eyebrows in the United States because of its alleged anti-Americanism. The U.S. House of Representatives has approved a proposal to finance radio and television broadcasts to Venezuela.


The list of new projects continues to grow. Analysts are trying to figure out if the proposals will bear fruit. “One of the problems I see is that Argentina and Uruguay have relatively little to offer in terms of an oil market, in comparison with Brazil and Venezuela,” says Battaleme. “The cost of offshore oil exploitation in Argentina is higher than in the rest of the countries.”  Nevertheless, there is “the advantage of becoming an expanded center of natural resources, with a global impact. In other words, this allows member countries to present the world with an independent plan focused on a resource like petroleum, which is vital for the global economy.”


More negatively, Palma believes the three new blocs can only be viable from a political point of view. “From the economic point of view, I believe that this approach is absolutely unviable because there is a shortage of capacity in those countries for strategic planning, and for realizing and maintaining projects of this magnitude.”


The experience of OPEC is something quite different, according to Palma. OPEC has become the cartel that determines prices. It is self-sufficient, and it has power to negotiate with the world’s most developed countries. “OPEC has more than a third of the world’s global crude production, and it is an organization that has years of experience,” says Palma.


Battaleme and Palma agree that inadequate capacity, supply and planning could hamper the success of the three new Latin American agreements, they cite another underlying factor that is even more important — the social dimension.


“It is unthinkable that countries that can barely manage their own social and educational problems want to take on a project that demands such a high level of managerial and administrative skills,” Palma stresses. “The democracies of the region are still weak, and face social conflicts and a poor distribution of wealth.” Battaleme suggests that, long-term, “These blocs must wind up creating a profitable economic option for participants in their regional cooperation efforts. They must be closely tied to the domestic political orientations of each government. If there are significant changes in the make-up of the participants, and the entire arrangement turns out to be unprofitable, its days as a place where integration takes place will be numbered.”