Dropping oil prices have undermined Latin America’s economic boom, and that may be a good thing for U.S. diplomats.
It may seem something of a paradox that while the region has suffered from dropping demand for commodities in China, the economic challenge also is forcing some Latin America leaders – particularly those on the left – to once again look north in search of business opportunities they had previously shunned.
“What that means is even if they don’t like the United States, the United States becomes an important economic relationship and a source of growth and investment,” said Michael Shifter, president of the Inter-American Dialogue in Washington.
Countries that had the luxury to have anti-U.S. policies five years ago have been forced to reconsider economic relations with the United States, Shifter said.
U.S. officials said they were already seeing tangible benefits as countries were more eager to work with the United States to diversify their energy resources and therefore reduce their reliance on Venezuela’s subsidized oil export program, Petrocaribe – a powerful tool that the Venezuelan government has been able to use to wield political influence in the region.
Foreign officials once resistant to the United States are now engaging with U.S. diplomats. Countries that previously avoided energy forums with the United States are seeking to attend.
“I don’t think it creates opportunities for the United States. It creates opportunities for the region,” said a senior State Department official, who spoke only anonymously because he was not authorized to speak publicly. “This is the time for some countries to say, ‘You know what, I’ve been stuck on fuel oil from Venezuela through Petrocaribe, and now I can diversify and get out of that scheme and create the kind of investment opportunities for companies to come in and install solar and wind.’ ”
The price of oil has fallen more than 70 percent since June 2014, when it was $115 a barrel, and while it rose 12 percent Friday it remains under $30 a barrel. While U.S. motorists have loved the cheap gas, which now averages $1.75 a gallon, it’s been a killer for oil-producing countries such as Venezuela, Ecuador, Colombia and Mexico.
China’s incredible growth over the past two decades was a huge economic driver for Latin America, which fed the world’s second largest economy’s voracious appetite for raw materials. The region’s top three exports to China – ores, oilseed and copper – grew from 50 percent to 72 percent of the region’s total exports from 2000 to 2014, according to the Atlantic Council, a Washington research center. At the same time, the rest of the world’s share of Latin America’s exports in these three categories fell from 42 percent to 32 percent.
That demand largely protected the region from the recession and drove the global economy. The United States was no longer the only game in town. But it also came at a heavy price.
Several of those countries became dependent on the high commodity prices and did not diversify, said Andrew Powell, a principal economic adviser for the Inter-American Development Bank’s research department.
As China’s growth stalled to its lowest point in 25 years, and commodity prices collapsed, Latin America went into crisis mode.
While some countries stashed money in savings, no one appears to have escaped the downturn. Those that didn’t prepare for harder times are worse off.
Venezuela, which has the world’s largest proven oil reserves, is on the verge of economic collapse. Public discontent over the country’s economy set the stage for opposition leaders to win back control of the National Assembly for the first time in 16 years.
Ecuador, where oil accounts for more than 50 percent of export revenues, is now paying more to produce oil than it’s making. President Rafael Correa told reporters last year it costs $39 to produce each barrel of oil that was being sold for less than $30.
Colombia, which exports about 50 percent of its oil production, has had to revise growth projections and is now talking about fiscal reform. Public concern about tax hikes is so high that it could scuttle a historic peace deal with Marxist rebels that will carry a high cost for turning thousands of guerrilla fighters into law-abiding citizens.
“They’re saying ‘Look, this government expects us to pay for this,’ ” said Eduardo Gamarra, a political science professor at Florida International University who surveyed groups of Colombians in the country’s five largest cities. “The business community doesn’t want any more taxes. If you get it translated to the average person, they’re already taxed enough, from their perspective.”
In Brazil, which has been a net oil exporter since 2011, there have been calls to impeach leftist President Dilma Rousseff as hopes for a bright oil-fueled future dim.
What that means is even if they don’t like the United States, the United States becomes an important economic relationship and a source of growth and investment.
Michael Shifter, Inter-American Dialogue
Mexico has a more diversified economy than its neighbors, but oil is still a major part of the economy. Citizens sometimes refer to it as “mi sangre,” or “my blood.” The Mexican peso hit a record low in comparison with the dollar Thursday as oil revenues have dropped to the point where they account for less foreign exchange than money sent home from Mexicans working outside the country. On Monday, Emilio Lozoya Austin, the chief executive of Mexico’s state-owned oil company, Pemex, resigned from his post.
The economic upheaval has sent politicians scrambling in search of new opportunities.
“There have definitely been countries that we’ve had less of an active relationship with that all of a sudden we’ve had a much better conversation, at least when it comes to the energy field,” the State Department official said.
Experts say the improved talks could lead to new trade treaties and export/import agreements, such as in manufacturing. Tourism could get a boost.
In Argentina, new President Mauricio Macri campaigned on a platform that promised to rip up the country’s memorandum of understanding with Iran and called for Venezuela’s ouster from the regional free-trade association Mercosur.
The Inter-American Development Bank’s Powell speculated that the political changes could lead to some countries rethinking earlier decisions not to join the Trans-Pacific Partnership trade agreement signed last year between the United States and 11 other Pacific Rim countries.
“In the good times there tends to be a shift to the left, and in the harder times there is a shift back to the right,” Powell said. “You can see that a little bit in what is going on in the region.”
In the good times there tends to be a shift to the left, and in the harder times there is a shift back to the right.
Federal officials said that as soon as they saw the price of oil dropping they recognized an opportunity to press forward with the Obama administration’s efforts to expand energy resources in the region. Last April, President Barack Obama traveled to Jamaica to unveil a clean energy partnership at a Caribbean summit that would help diversify energy resources – and therefore reduce reliance on Venezuela’s Petrocaribe program.
In the months since, countries that had adopted seemingly anti-American positions have softened their approach, according to experts who have consulted with U.S. officials.
“There is definitely a shift,” Shifter said. “And it’s a chance for the United States to take advantage. It’s unfortunate that it has to happen when they’re suffering, but that’s the reality.”