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Pumped up: high oil prices can be a double-edged sword for Latin American economies.

High petroleum prices are goosing up economies across Latin America, which as a region is responsible for 10% of the world's oil output. For now, all signs point to a continuation of this trend. "There are no factors to indicate otherwise. Petroleum producers are working at full capacity, and demand is greater than production and refineries can meet," says David Shields, an independent oil analyst. U.S. consumers are responsible for 20 million barrels of daily demand, while China consumes 6 million barrels and Brazil 1.8 million a day.

Since 1917, the world's fifth-largest oil producer, Mexico, has relied on foreign sales for its primary source of foreign income, which in 2004 totaled US$21.23 billion on 1.87 million barrels a day of exported crude. Although that seems like good news for now, in the longer term it could turn into a nightmare due to serious problems facing state oil company Petr61eos Mexicanos (Pemex). This could put current output levels in jeopardy and turn Mexico into an oil importer. "It's frightening to consider Mexico becoming even more of an oil economy, since it would become that much vulnerable to price volatility, and that is a danger" Shields says.

The Mexican government's monopoly on oil has led to serious problems--ones which make exploration more expensive and uses up reserves--such as a lack of infrastructure spending, aging technology, too many workers and high payments to public accounts. Mexican President Vicente Fox understands that the country urgently needs to reform policy and give Pemex more autonomy, but his plans have fallen on deaf ears in the Congress.

In June, the lower house approved a new fiscal structure to be in place by January 1, but it won't be enough to make up for 20 years of delay in reforms at Pemex. It's estimated that Pemex could receive more than $2 billion in the first year of the reform, a figure that would increase gradually, but the Energy Ministry figures the state-run company's problems mean spending more than $15 billion a year to make Pemex a sustainable business and still maintain a reasonable export platform. "If Mexico doesn't make these reforms, its enormous potential in the world market will remain just a potential," says George Baker, president of energy consultancy Baker & Associates in Houston, Texas.

Unlike what's happening in Mexico, Brazil's state oil company Petrobras is rapidly building an image of an efficiently run operation, although at lower production levels than Pemex's. Brazil is not a major crude exporter. Its own energy outlook is well under control. "Today we have a calm oil situation because we are already producing 90% of our consumption and possibly in 2006 we'll manage to post very high output levels," says Adriano Pires, director of Centro Brasileiro de Infra-Estrutura, an energy consultancy.

In fact, Petrobras President Jose Sergio Gabrielli forecasts that in 2006 the country will become an oil and oil-derivative exporter, should the trends of the first quarter hold up through the end of the year. In that quarter, Brazil exported $1.4 billion and imported $1.3 billion of crude. This is an important achievement when one considers that the South American economic giant once imported 85% of its petroleum consumption.

Artificial. Despite circumstances, Brazil has been affected by high crude-oil prices. Brazilian policies stipulate that gasoline, diesel and liquid propane gas prices do not rise in response to international markets. Nevertheless, the cost of jet fuel, petrochemicals and fuel oil--which is 60% of Petrobras' output--has risen in line with foreign prices. "This creates an artificial effect in the domestic economy of keeping inflation low while, thanks to high oil prices, Petrobras' earnings decrease. It helps the consumer, but it hurts investors," Pires says.


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Title Annotation:OIL & GAS
Comment:Pumped up: high oil prices can be a double-edged sword for Latin American economies.(OIL & GAS)
Author:Rueda, Marisol
Publication:Latin Trade
Geographic Code:1MEX
Date:Oct 1, 2005
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