FYI | May 15 2006
By Greg Peel
While Peely’s POV is intended as a medium for this writer to throw up a bit of commentary on diverse matters – my so-called "point of view" – for this particular column I was moved to take a slightly different path. What has piqued my interest lately has been some brief stories in the Australian press regarding moves by Bolivia’s new president towards nationalisation of that country’s oil and gas fields. Just how significant, or otherwise, are the implications?
As South America’s poorest nation, it’s hard to see a bit of posturing from the country’s first indigenous leader as causing too much of a ripple on the world geopolitical scene. Certainly, Australia’s press has not provided what might be called extensive coverage. However, given neighbouring Venezuela had previously undertaken the same process, while shaking a stern fist at the US, I thought there might just be a bit of a trend developing that could impact upon the greater global energy crisis.
I am no expert on South America, but fortunately my FN Arena colleague, Rob Rudnicki is. Rob spent two years in Caracas as national news editor for the Daily Journal and Latin American correspondent for Business Monitor International.
He also worked as a translator for the Venezuelan Foreign Ministry and Petroleos de Venezuela. So I asked Rob if he would indulge me in a little fireside chat. This article is a précis of that conversation.
But before we launch into that, let’s set the scene.
US President George Bush has appealed to his people, about thirty years too late, to conserve oil. The thrust of his argument is not specifically an environmental issue, it is a case of reducing the US’ reliance on the recalcitrant Middle East.
The high price of oil has been driven to a large extent by the emergence of China as an economic power. The US has an uneasy relationship with this communist/capitalist hybrid. But ironically, China’s savings are funding extravagant US consumption, fuelling a global imbalance that could severely impact on the US economy, according to many observers. Within Congress there is a groundswell of belief that China should be made to fall into line regarding its currency, and that protectionist trade measures should be immediately put into effect.
Cold War memories have also been evoked recently as a public slanging match has become more and more heated between the US and Russia. Dick Cheney has accused Vladimir Putin of using oil and gas reserves for global blackmail. George Bush has warned Putin of a slide back away from democracy and into some form of totalitarianism. Putin has told Bush to butt out and stop interfering with the entire world.
The US needs Russia and China onside if it is to achieve any sort of resolution against the new problem – Iran. Iran has enriched uranium for the stated purpose of building a nuclear energy industry, but few trust the intentions of hardline Islamic populist Mahmoud Ahmadinejad. Threats are flying from the US – sanctions, attacks, anything to kybosh Iran’s sovereign right to a nuclear industry.
The irony of the Iran situation is that the US needs Iranian oil, or at least it needs Iranian oil to keep flowing or else the price will be over US$100/bbl before you can blink. But then Iran has no refineries, so it needs US petrol. This uncomfortable dichotomy will ensure there is a lot of posturing yet to come.
The world’s second biggest reserves of oil are in Iraq. That country is a disaster that will probably stay that way for a decade. Bush’s greatest ally in the "war" in Iraq is British Prime Minister Tony Blair, who presently does not look like he’ll be so for much longer. His successor will be Gordon Brown, who has previously admitted his "deep reservations" about Iraq. The US could find itself further isolated if it loses the support of Britain.
While all of this has been going on, Evo Morales, the newly-elected President of Bolivia, has put his foot down against foreign oil and gas companies. Bolivia is one of only two land-locked countries on the South American continent and is surrounded by the other one, Paraguay, as well as Brazil, Peru, Chile and Argentina. Dirt poor, having suffered from years of corrupt government, Bolivia boasts South America’s second largest reserves of natural gas (after Venezuela).
Since Bolivia’s oil and gas industry was privatised in the 1990s, foreign companies have invested about US$3.5 billion and earned all the spoils. Companies operating in Bolivia include Britain’s BP and British Gas, Spain’s Repsol-YPF, France’s Total and US’ Exxon-Mobil and Haliburton. But the biggest player is Brazil’s Petrobras. Brazil imports 67% of its gas needs from Bolivian gas fields at a ridiculously low price. Argentina also has an interest, but it only amounts to 4%.
Morales has given foreign companies six months to renegotiate their contracts with Yacimientos Petroliferos Fiscales Bolivianos, Bolivia’s state-owned oil company. He has the troops at the ready. If that’s not enough, he has the people at the ready as well. Poor Bolivians have nothing to lose. And it is those people that Morales is attempting to feed.
Backing Morales all the way in his stance is Venezuela’s charismatic, intelligent, left-wing President Hugo Chavez. Morales turned to Chavez at the first instant. On his first day in office, Morales and Chavez signed an accord that will see state-owned Petroleos de Venezuela assist its Bolivian counterpart in developing its own energy reserves. Chavez is considered an enemy of the US.
So what might this all mean? A storm in a tea cup? Or a trend that might prove to ultimately cut off the US from another of its previously more reliable sources of energy, right in its own backyard? It is at this point I turned to Rob Rudnicki, and this what I learnt.
South America has been shifting quietly left for a while now. Only Colombia remains as a bastion of right-wing politics, and it is heavily supported by the US. Little significance is ascribed to Paraguay or Uruguay either, and the Guineas are just very small.
The remainder can be split into collectives of Venezuela, Ecuador, Bolivia and Peru to the north, and Chile and Argentina in the south. The largest country, Brazil, is an odd one out given its Portuguese heritage.
The northern countries feature large populations of mixed Spanish and indigenous blood (the very poor) and Spanish minorities (the very wealthy). For decades, these countries were hotbeds of corruption under supposed democratic rule where the rich got filthy rich and the poor attempted to subsist. Resources were exploited by foreign companies with vast proceeds going directly to the wealthy minority.
Brazil has its own problems with a burgeoning population of the disenfranchised. Argentina and Chile, on the other hand, have smaller black populations and tend to associate themselves more closely with Europe.
Although there are clear divides, the governments of all these countries tend to the left in differing degrees. The most left-wing of all of them is Venezuela.
Venezuela turned the tide on corrupt society when Chavez came to power in 1998. He united the state oil companies and struck compromise deals with foreign producers that maintained their interest but channelled realistic revenues back to the Venezuelan people. He had to fight his own bureaucracy, drawn from the corrupt and wealthy, all the way.
When he couldn’t force the supermarkets to sell food to the poor at reasonable prices, he used the army to start a government supermarket. When he was frustrated in his attempts to reform a one-sided health system, he again started his own – with the help of thousands of Cuban doctors. Chavez is a populist in the Castro mould, and he is loved by his people. Even the Spanish minority has been forced to capitulate to Chavez’s reforms.
Fidel Castro is a close friend and ally of Chavez. The US considers him an enemy, but denies any attempts to oust or assassinate the leader, despite his constant protestations that the Americans have been doing just that.
When Morales won power in Bolivia he joined ranks with Chavez. He also joined the Bolivarian Alliance for the Americas (named after Simon Bolivar), whose Spanish acronym, ALBA, means "dawn". This alliance is the vision of Castro and Chavez, with an agenda to bring the Caribbean, Central America and Latin America together as a bloc of trade and support.
Despite Castro being an influential figure in the plan, the intention is not to necessarily fight or shun the US. The US is Venezuela’s biggest customer for oil for and gas, and the US’ fifth biggest supplier after Mexico, Canada, Saudi Arabia and Nigeria for oil, and third biggest after Canada and Mexico for oil and gas combined.
From a demand/supply perspective, the US and Venezuela need each other. Venezuela is, however, an OPEC member – the only non-Islamic nation in the organisation.
Bolivia is not a major supplier to the US, and its role in the scheme of world oil supply is minimal. But it is a very big supplier of gas, mostly to its southern neighbours. It nevertheless beefs up the Alba alliance, and the signs are that resource-rich Peru and Ecuador will soon join up as well. Peru is currently in election mode, and a populist, left-wing ex-general has shot into contention.
Chavez’s agenda is to create leverage. There is a lot of posturing going on within South America, and beyond. As a united bloc the northern Latin American countries can use the power to achieve their goals – to exploit their own resources for the benefit of the general population.
Another important player in this part of the world is Mexico – the greatest supplier of oil to the US. Mexico’s Vincente Fox tends to the right and is an ally of the US. Nevertheless, Mexico and Venezuela continue to renew the San Jose accord which ensures that between them they supply oil and gas on beneficial terms to the poorer nations of Central America and the Caribbean. Cuba is included in this mix.
There is every chance that Fox’s predecessor will come from the ranks of the left, if the whole Central/South American trend is continued. When this happens, Alba could find itself in a very, very powerful position.
In the meantime the posturing continues between Chavez, Morales, and their counterparts from Brazil and Argentina. Earlier in the month the four presidents met to discuss Morales’ intentions with regards to his country’s resources. Feeling was that a compromise could well be reached. There was also talk of building a massive pipeline that would stretch the length of South America’s Atlantic coast.
Since then Brazil and Argentina have backed off somewhat, but again this is part of the posturing. Clearly, Brazil needs Bolivian and/or Venezuelan gas. Sitting on the fence for the moment is Chile, whose government is probably the least left-wing. For Chile, there are other considerations.
Morales has told Brazil and Argentina that part of the deal is they cannot on-sell gas to Chile. As to whether he could police this is by-the-by, but the reason for it takes us back into history. Decades ago, Bolivia owned a piece of land that stretched from its current border a mere couple of hundred kilometres or so to the Pacific coast. Chile stole it, the Bolivians argue, and Bolivia has been land-locked ever since.
It would be very much in the interests of Bolivia if it could reclaim a corridor to the Pacific, even if it were just a road and a pipeline, and build a port. It would also be very much in the interests of Venezuela which is stuck on the Atlantic side of South America. Driving this interest in particular is China.
China has sent delegations to every far-flung corner of the earth in an attempt to establish diplomatic and trade ties. It’s a softly-softly approach accompanied by lack of fanfare as the Chinese slip in and slip out of nations with which it would like to do business. South America is no exception.
China is now the second largest consumer of oil on the planet already and it is only now that the Chinese face the prospect of owning automobiles en masse. The mind boggles at what this might do to oil demand.
As a supposedly communist country, China’s allegiances clearly lie more with the likes of Chavez and company than they would with an interfering US. The alliance makes perfect sense as a large supplier of oil and gas. If there were also a Pacific port for easy transport north to China then the economic benefits for both sides are obvious, although this current impediment does not actually rule out trade. Besides, if Peru falls into line, it could provide the Pacific connection.
Chavez would greatly satisfy his goals on behalf of his own people and the people of northern South America if he could reduce his reliance on sales to the US and increase trade with China. Having these two customers fighting it out in the marketplace could only result in better prices and better revenues, and would provide him with leverage against the various foreign-owned producers, Brazil’s Petrobras included.
All these developments have occurred over time as the US has been focussing on other matters, namely the Middle East. If the US invaded Iraq in order to ensure its own oil supply then it hasn’t worked. If it invaded to bring democracy and peace to Iraq well that hasn’t worked either. Now it has Iran to contend with, and President Ahmadinejad has been busy shoring up support for his nuclear energy plans with his Islamic friends as far away as Indonesia.
Bush’s advisors have now warned the US president that they can no longer afford to lose focus to the south. A summit has been called to bring together supporters and opposers of Chavez together for urgent talks. In the meantime, Chavez and Morales are off to talk to the European Union, members of which are also concerned (particularly Spain). Vincente Fox has told his counterparts they risk isolating themselves if they persist with their posturing. No doubt Chavez disagrees.
Sitting pretty while watching the whole affair will be Vladimir Putin. Saudi Arabia may be a reliable source of oil for the US for the moment, but alliance with this Islamic Arab nation is always tenuous. And if either the US or Israel start to throw their weight around with Iran, the Saudis may not be too pleased. Whichever way you look at it the Middle East is a delicate situation for the US.
But if Middle Eastern oil supplies become severely restricted, the US only has Russia left to turn to. Russia still has vast supplies of oil and gas, and it has a level of control over the recently confirmed major reserves of Kazakhstan. With all the rhetoric that’s been flying lately, it’s hard to see Putin rushing to the aid of an oil-starved US as a loyal ally. China, too, has a history of bad blood with Russia, dating back to the Soviet invasion.
While the situation in South America is not dire, and developments are not nearly as daunting as those in Iran, Nigeria or elsewhere, its level of significance in the global marketplace must surely be escalating.