By Alex Kimani
The recent rise in oil prices and the pressing need to rescue their economies have incentivized Latin American countries to develop their fossil fuels
- Latin America is lagging in the energy transition due to outdated policies and resource nationalism
- An abrupt devaluation of oil and gas assets could lead to a major socio-economic shock in several Latin American countries
Early this year, the World Bank named Iraq, Libya, Venezuela, Equatorial Guinea, Nigeria, Iran, Guyana, Algeria, Azerbaijan, and Kazakhstan as the most vulnerable oil-producing nations due to their high exposure to the oil and gas sector and relative lack of diversification. Latin American economies are, however, not much better off due to their high reliance on oil and lack of a clear roadmap in the global energy transition.
Venezuela, Ecuador, and Colombia are particularly dependent on oil exports and revenues. Bolivia and Trinidad depend heavily on natural gas. Meanwhile, the small nation of Guyana is poised to become the largest per-capita oil producer in the world, thanks to the swathe of oil discoveries made by ExxonMobil and its partners. Argentina, Brazil, and Mexico are not as fossil fuel dependent, but oil and gas still rank among the largest industries in each country in terms of fiscal revenues, exports, and investments.
With the recent rise in oil prices and the pressing need to rescue economies, many countries in the region are looking to develop their fossil fuels. To date, considerably more funding has been allocated to fossil fuels than renewable energy as part of recovery packages. While some national oil companies are improving their energy efficiency and reducing gas flaring, the region’s energy sector is not aligned with the Paris Agreement’s goals of reaching net-zero emissions by 2050.
A report by the Inter-American Development Bank (IDB) shows that in scenarios consistent with the 1.5-degree goal, Latin American oil production needs to fall to less than 4 million barrels per day by 2035–60% below pre-pandemic levels. This would mean that up to 81% of their proven, probable, and possible oil reserves will not be used before 2035. The fiscal impact would be enormous: the region’s oil exporters could lose up to around US$ 3 trillion in royalties by 2035 if strong global climate action materializes.
Latin American nations combined emit as much carbon dioxide (CO2) as Russia, the world’s fourth-largest CO2 emitter.
Speaking at this year’s all-virtual CERAWeek conference, experts have said that Latin America is lagging in the energy transition due to outdated policies and resource nationalism in nations like Venezuela and Mexico, combined with an urgent need for cheap imported fuel.
Last year, Latin America imported 2.69 million barrels per day (bpd) of crude and refined products from the United States, its largest source of oil imports, representing a 12% decline from the record 3.05 million bpd in 2019, but still up 88% from a decade earlier.
Earlier this year, the Texas deep freeze knocked out natural gas supply to Northern Mexico, leaving households without electricity and forcing hundreds of factories to slow down or close. That motivated the Mexican government to return to coal and fuel oil for power generation. In February, Mexican President Andres Manuel Lopez Obrador ordered state power company Comision Federal de Electricidad (CFE) to reopen thermoelectric plants set for dismantling, while questioning the country’s dependence on U.S. natural gas as the primary fuel for electricity.
“CFE has important investment plans today, but they do not include renewables, power transmission or distribution,” Tania Ortiz, CEO of Mexico’s energy company IEnova, said at the CERAWeek conference.CFE ( Comisión Federal de Electricidad) is Mexico’s state power company.
Mexico has delayed planned reforms to limit emissions from motor fuels, including a regulation requiring truck makers to switch engines to ultra-low sulfur diesel (ULSD). Meanwhile, Venezuela, hit by underinvestment and U.S. sanctions, has done nothing to reduce pollution from motor fuels since its state-run firm PDVSA removed lead from gasoline in 2005.
There are encouraging exceptions, though, including solar energy by Peru and Chile, as well as Brazil’s large hydroelectric capacity and its aggressive bet on biofuels and state-run Petrobras’ new drive to supply biofuels to the aviation industry. Meanwhile, Colombia’s president Ivan Duque has been pushing companies to dramatically cut CO2 emissions while expanding non-conventional renewable energies.
According to IDB, the committed emissions of current power plants in Latin America and the Caribbean are inconsistent with the Paris Agreement. In fact, committed emissions would exceed the established limit by 150% if all the planned and announced fossil fuel power plants in the region were built, most of them based on natural gas.
IDB has warned that the abrupt devaluation of financial assets could create varying degrees of instability in financial markets, which in turn could lead to macroeconomic instabilities. Stranded assets could also create political instability due to a rapid loss of wealth among the owners of affected capital assets and affected workers. If the emissions reduction targets in the Paris Agreement are met, the global value of stranded assets associated with projects that have not yet recovered their initial investment is projected to be US$304 billion in 2035, US$180 billion of which correspond to the oil and ga