LATIN AMERICAN HYDROCARBON NATIONALISM ON THE RISE-FOR NOW

Hydrocarbon nationalism is once again on the rise in Latin America. The pendulum appears to be swinging back from a liberalized model that fails to redistribute and maximize government rents to a nationalist model that fails to ensure sufficient investment to sustain hydrocarbon output and growth. The underlying conception of wealth creation and wealth redistribution as opposing and mutually exclusive forces has hampered hydrocarbon sector and broader economic development in Latin America for many years. Although some countries have broken out of this mindset, those with the greatest resource base continue to be trapped in the application of management models and capital allocation practices that may hinder the industry's long-term sustainability. As a result, though hardly apparent today, the pressures that will cause the next swing toward a more liberal model are already gathering force.

*Governments following a nationalistic model normally base a growing fraction of their fiscal spending programs on hydrocarbon revenues. This leads to rent-seeking behavior that is overly dependent on the implementation of highly regressive fiscal frameworks that often ignore industry investment needs, impairing growth and reducing price robustness. The eventual result is industry decline and diminishing rents.

*As it has been implemented in Latin America, hydrocarbon nationalism relies on a strong price environment or growing oil production to remain viable and support the seemingly insatiable appetite of a government and an economy that increasingly depend on hydrocarbon revenues. As demand for government rents grows, however, investments are increasingly constrained, and hydrocarbon production eventually falters. The revenue streams that nationalist governments rely on diminish, worsening economic performance and increasing social pressures. Falling oil prices accelerate an eventual industry collapse, forcing deregulation and implementation of more attractive terms to lure back investment.

*The promotion of hydrocarbon nationalism relies heavily on the national oil company's (NOC) resources and capabilities. In this sense, nationalist NOCs are normally impaired by multiple and diverse government demands that deviate from the core priorities and needs an oil company should have. The result under most price scenarios is an NOC that lacks capital resources and unable to stop industry decline or to develop its portfolio.

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