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Hunt Buckley and Larry Pascal in Latin America Advisor - Energy: How Increased Oil Prices Affect Latin America
03/14/2011

In a Featured Q&A in Inter-American Dialogue's Latin America Advisor - Energy, William (Hunt) Buckley and Larry Pascal respond to the questions: "With ongoing tensions in the Middle East, oil prices have soared to heights not seen since before the economic crisis. What is the impact of the surge in oil prices on Latin American countries? Which countries and industries stand to benefit? Which stand to lose? How does the situation compare to the last time prices reached $100 per barrel in 2008?"

"Some of the effects attributed to soaring oil prices are already being felt in Latin America. At first glance, it would seem that countries with significant oil resources can only benefit from higher prices. Net exporters, such as Mexico and Venezuela, are generally expected to report a positive impact on their public finances and appreciation in their currencies due to oil price increases. Other Latin American countries with oil production, such as Brazil and Colombia,are also expected to reap the benefit of increased prices, especially within the oil and related industries. In Mexico's case, oil price increases may also make Pemex's new contract model more attractive, because Pemex's limit on payment is tied in part to oil prices. However, unless offset by factors such as increased efficiencies, inflation caused by high oil prices can potentially reduce the benefits and could introduce destabilizing political factors. Countries that provide subsidies or enforce price limits on staple products, transportation and energy may have to confront some politically unpopular choices. They may have to phase out or eliminate subsidies, increase prices, or, to support subsidies, borrow or tax more or dip into oil-generated surpluses. Some may simply defer politically unpalatable decisions to the next government. For net importers, the situation is exacerbated because, without oil-generated support, their choices are more limited. Any action taken will likely trigger some level of political disaffection and uncertainty. Moreover, the world economy is arguably in a more tenuous condition, due to the lingering effects of the global financial crisis, lack of confidence in many developed markets to meet their sovereign debt commitments and sustained unemployment. Finally, currency appreciation makes one's exports more expensive and hence less competitive and both Brazil and Mexico are fighting the effects of this situation."

Excerpted from Latin America Advisor - Energy, Inter-American Dialogue, March 14-18, 2011. To read the full article, click on the PDF link below.