The starvation diet: Latin America's oil producers get no windfall from war and high prices. Their problems begin at home.

On the face of it, Latin America's oil reserves should be a ticket to development, economic strength and closer ties to the world.

Don't bet on it. Mexico and Venezuela, along with Saudi Arabia and Canada, are among the top exporters of crude to the world's-largest petroleum products consumer, the United States. But oil experts fully expect countries in the former Soviet Union to increase capacity tremendously over the next few decades, while Saudi Arabia--the world's runaway oil giant--will remain in the driver's seat.

Saudi production capacity alone is already so high that the kingdom can easily manipulate world prices. By 2025, Saudi Arabia could triple its output to 30.3 million barrels per day, and Russia is projected to almost double in that timeframe to 16 million barrels, 2 million barrels more than Mexico, Canada and Venezuela's projected output combined, according to the U.S. Energy Information Administration's 2003 forecast.

Then there's Iraq. It will take time, but a rebuilt Iraqi oil industry could produce 6 million barrels a day, up from pre-Gulf War I numbers of around 3.5 million barrels and up from the 1.6 million it produced before the most recent conflict.

"They have the second highest reserves after Saudi Arabia, 112 billion barrels of oil reserves compared to 260 billion," says John Lichtblau, chairman of Petroleum Industry Research Foundation, a non-profit think tank. "That's only what's been found up to 1990. There's been no exploration for 12 years."

Fast foreign cash for oil development in Latin America will be back in vogue soon, analysts suggest, but currently high prices of around US$31 a barrel will subside in 2004, dampening the ability of the region's governments to self-finance expansion. Long-term, real prices are not likely to stay above $25 dollars per barrel, nor can they dip below $15 per barrel and stay there. At $20 per barrel, right in the middle of the price range, Latin American producers can finance their own production and pay for programmed social spending but precious little else.

That's because a stable oil price, enforced by the Organization of the Petroleum Exporting Countries (OPEC) oil cartel, will keep Latin American revenues--and future capacity--in check. In part, the region's governments earmark too much of their revenues to fund politically necessary welfare programs, or lose it to endemic corruption.

In part, too, the region's producers have simply already lost the race--despite spending plans in the tens of billions of dollars. "I don't think Latin America has sufficient capital to develop reserves to be a swing producer like Saudi Arabia or affect non-OPEC production like Russia," says Alexandra Parker, an oil and gas analyst with Moody's Investors Service in New York.

Chaos has not been in short supply of late in the oil world. The rise of non-cartel production has divided OPEC; the Iraqi conflicts have taken millions of barrels off the market for more than a decade; political infighting at Venezuela's Petroleos de Venezuela (PDVSA), too, has temporarily cut supply.

But it's in the oil producers' interest to toe the Saudi line on prices. Oil should not be so high as to choke off demand and slow the world's major economies, nor so low as to impede investment in new oil production capacity. Currently, OPEC's capacity to supply oil is only a few years ahead of growing demand. "One of the reasons OPEC likes to keep the price low is that if the price is high there is a huge incentive to develop new, more efficient technologies," says Jed Bailey, director of research for Latin America at Cambridge Energy Research Associates.

Venezuela says it is ramping back up to its target of 3 million barrels and its managers talk about reaching 5 million barrels per day in a few years time. The Andean country has been relatively open to foreign investment over the past decade for heavy-oil projects in the Orinoco belt, the so-called apertura, but that has been only a moderate success for investors, analysts say. The government is not expected to invite large numbers of new investors except under financial duress. The U.S. government, meanwhile, doesn't see Venezuela breaking the 5 million barrel mark until almost 2020.

In Mexico, the potential for increasing production is huge, but at a cost. The country controls 10 billion barrels of recoverable oil in Veracruz alone--one-third of the country's total reserves--but it needs between 13,000 and 15,000 wells to get the oil out. Building that many oil wells is expensive, so development of the project will be sensitive to the price of oil, analysts say.

The unspoken obstacle is Petroleos Mexicanos (Pemex), Mexico's perpetually under-invested state oil giant. It pays out more than 60% of its revenues to the government and often ends up running in the red. There is little consensus in the Mexican Congress, analysts agree, to allow Pemex access to significant outside capital, despite rumblings among some politicians to open the state oil giant. Oil has become identified, politically, with national sovereignty, so reformers have little room to maneuver even when making the most obvious case for foreign capital: expanded oil revenues.

Brazil has seen a rush of foreign investment in recent years but the location of its oil--deep, offshore wells that require billion-dollar floating rigs--has meant many outside investors are taking a wait-and-see approach, hoping recent platforms will turn into gushers before committing billions more to the country. Aside from oil, too, Petrobras continues to be a kind of national resource: a generator of jobs and foreign exchange revenue. Selling off too much of that hurts, even if it means exporting less. If production does increase enough to export, it will never be enough to affect the world price. "You won't see much of an increase in places like Brazil. They are producing as much as they can, but they're own demand is rising," says Lichtblau.

Latin America's major producers--all government run--say they are plunging ahead just the same, partly with the help of deep-pocketed private oil majors. Brazil's Petrobras says it will invest $34.3 billion by 2007, starting with a $7.2 billion investment in 2003. More than 60% of the money will be spent on exploration and production, including in the Gulf of Mexico, Latin America, and western Africa. Petrobras is also seeking new refining assets in the United States.

PDVSA in Venezuela says it will invest $890 million. The Venezuelan government, meanwhile, inked a $2.7 billion deal with Royal Dutch Shell Group and Nippon Mitsubishi Oil Corp. to build a natural gas project in northeastern Venezuela. The country expects to become a major exporter of natural gas by 2007.

Mexico's Pemex says it will invest $4.3 billion by 2011 to boost production in the Gulf of Mexico. The company invited foreign companies to bid on $8.8 billion in service contracts, a decision some elected officials criticized as a step toward privatization. Meanwhile, Pemex will spend $2 billion by 2004, it says, to recover 99% of the natural gas produced with its crude oil. The Mexican oil company also expects to spend another $1.6 billion to add eleven plants to its oil refinery in Minatitlan, to be completed by 2007.

So, will the world run out of oil? Not soon, experts say. Since oil was first pumped, 140 years ago, technologies have improved. Once, in a given field, often less than half the oil was pumped out before the energy and equipment costs of extracting it exceeded the benefit. But better pumping techniques has made closed fields cost-effective once again, and the industry is better at pumping oil offshore, in volatile environments and in high winds.

How we use oil is changing, too. Automobiles today use far less gasoline than in the 1950s, and hybrid forms of cars that use momentum to charge internal batteries--already commercially available--promise to reduce our consumption as more of the developing world starts to own and drive cars. Fleet vehicles in many countries now run on natural gas that, despite currently high prices, is a vastly plentiful fuel.

"The amount of oil left in the world has hovered around 20 years for maybe the last 80, 90 years," says CERA's Bailey. "If India and China had the same per capita oil consumption of the U.S., that would be a huge strain. But at the same time, new technology and new areas to find oil keeps bringing in new oil, so we always seem to find new areas to meet demand, even as it grows quickly."

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GREG BROWN * MIAMI