The Fuse

Low Oil Prices Spurring Positive Energy Security Developments in Americas, But Risks Loom

by Matt Piotrowski | June 10, 2016

Energy security shifts in the Americas from low prices have had mixed results. Weak oil and gas prices have been a boon for consumers and have fostered overdue reforms in producer countries, but reduced investment on the supply side and the economic meltdown in Venezuela raise a number of open-ended questions about regional stability and security going forward.

Panelists speaking before the House Foreign Affairs Committee’s Subcommittee on the Western Hemisphere on Thursday laid out the many challenges of achieving energy security in the Americas and the Caribbean. One of the main themes was that defining energy security goes beyond oil, emphasizing that LNG imports and renewables are important sources of supply for small countries in the region that are not producers of energy. Another key issue raised was the fact that Caribbean countries need to use this period of low prices to wean their dependence on Venezuela’s Petrocaribe program. Third, the stability of the region with regards to energy is dependent upon diversity of supply and commitment to long-term investment.

“We are seeing a microcosm of the U.S. experience in Latin America, as some oil-producing countries move away from nationalist models and embrace more modern approaches to energy development and reform.”

One of the most important positive outcomes of the oil price collapse is that various producing countries are diversifying their economies and introducing reforms—although such changes don’t come without some pain.

“We are seeing a microcosm of the U.S. experience in Latin America, as some oil-producing countries move away from nationalist models and embrace more modern approaches to energy development and reform,” Amos Hochstein, Special Envoy and Coordinator for International Energy Affairs Bureau of Energy Resources at the U.S. Department of State, told the subcommittee in his opening statement. “As a result, many oil-producing countries are facing economic challenges, but not an outright crisis.”

In Mexico, the government is now making historic reforms in its energy sector in order to boost production and pull in international investment. The country’s opening occurred at a bad time with prices having crashed, but for the long run, the reforms will increase investment, support the labor market, and increase the security of supply for the country and its neighbors. Argentina is now starting to increase its investment in its gas sector, which holds abundant reserves. In fact, the South American country holds the second largest shale gas reserves in the world. Argentina has neglected investment and was hamstrung by a constricting regulatory environment, but the Macri administration has changed course, acknowledging the country’s resource potential. For Colombia, after hitting a milestone of 1 million barrels per day of production a few years, it has been hampered by low oil prices, but the government has taken measures to boost output while also working with the U.S. to develop unconventional reserves.

Still, the situation in Venezuela, home to 53 percent of the region’s oil reserves, is worrisome. Inflation in the country is more than 700 percent, many citizens are having difficulty with basic needs, and oil production has faltered by roughly a third in the past decade. This declining production is “malpractice” on part of the government, Hochstein said.

The turmoil in Venezuela has put the spotlight on Petrocaribe, an alliance formed a little more than a decade ago for the producer country to supply small Caribbean states with oil below market price.

The turmoil in Venezuela has put the spotlight on Petrocaribe, an alliance formed a little more than a decade ago for the producer country to supply small Caribbean states with oil below market price. A number of subcommittee representatives noted their worry surrounding this program given the circumstances in Venezuela. While members of Petrocaribe need Venezuelan oil, the current crisis could prompt the U.S. to step in and provide energy assistance to these consuming countries. Hochstein made a passionate plea during the hearing for countries to leave the alliance and diversify their supplies. “Venezuela has long used energy as a political lever on its neighbors through Petrocaribe, which has created not just an oil dependency, but more critically, a financial dependency,” Hochstein said in his opening remarks. “This is why we are concerned about the linkage between the declining capacity in Venezuela, and the energy and fiscal security of the broader region.”

With U.S. producers now able to freely export crude oil, the U.S. can be more flexible in supporting the countries that rely on Venezuela.

LNG exports to help

Besides the export of crude to countries in the Caribbean and Latin America, the U.S. can now send LNG to these markets—a huge benefit for them given their proximity to the U.S. market.

Besides the export of crude to countries in the Caribbean and Latin America, the U.S. can now send LNG to these markets—a huge benefit for them given their proximity to the U.S. market. Moreover, prices in the U.S. are currently the lowest in the world. Barbados and Brazil have taken cargoes of LNG from the U.S., while Jamaica has adopted LNG as an energy source. Expect these trends to continue. “It is worth noting that in the first cargoes moving from Sabine Pass were purchased by Brazil’s Petrobras,” said Melanie Kenderdine of the Department of Energy at the hearing. “The U.S. entry into world LNG markets in a significant way (volumes are only exceeded by those of Qatar), will also put downward pressure on European gas prices, and the competition for customers could constrain the non-competitive practices of Russia.”

Hochstein made clear that efforts to boost energy security in the Caribbean and Latin America need to go beyond the U.S., however. “It cannot be just about the U.S.,” he said, adding that Canada, Mexico, and the EU need to be brought in to help provide stability and security to the region.

OPEC strategy and global supply outages

Current damage to the U.S. oil industry could have long-term energy security implications for the U.S. and its allies in the Americas, and could also lead to a price spike in the coming years.

Jeff Duncan (R-South Carolina), chairman of the subcommittee, said he is growing concerned with the U.S.’ ability to support other countries at a time its domestic oil industry is going through a lot of strain. Announcing his support for H.R. 4559, which would establish a commission to look at the effects of OPEC’s policies on the U.S. economy, Duncan listed the consequences of the cartel’s strategy to knock off high-cost non-OPEC supply—more than 100 bankruptcies in the U.S. oil industry; some 150,000 workers laid off; a sharp reduction in drilling rigs; and billions in deferred investment. These trends could have long-term energy security implications for the U.S. and its allies in the Americas, and could also lead to a price spike in the coming years.

Securing America’s Future Energy (SAFE), in its recent National Strategy for Energy Security, touted the idea for the OPEC commission to look at how Saudi Arabia’s plan of pumping at high levels has undermined the U.S. oil industry and lulled consumers into complacency, supporting long-term oil demand.

When discussing the situation in the global oil markets, Hochstein highlighted the fact that disruptions anywhere affect markets everywhere, pointing out that supply outages are the highest level since the Energy Information Administration (EIA) started keeping track five years ago.

eiaoutages2

In achieving true energy security, it is important that “no country in the world is beholden to one supplier,” Hochstein said. The key is not for the U.S., or the Americas in general, to become solely energy “independent” but instead seek to provide a buffer against outages and geopolitical risk and secure diversity of supplies.

 

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