US military sees oil nationalism spectre

FT.com
By Andy Webb-Vidal in Caracas
Published: June 25 2006 22:03 | Last updated: June 25 2006 22:03

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Future supplies of oil from Latin America are at risk because of the spread of resource nationalism, a study by the US military that reflects growing concerns in the US administration over energy security has found.

An internal report prepared by the US military’s Southern Command and obtained by the Financial Times follows a recent US congressional investigation that warned of the US’s vulnerability to Venezuelan President Hugo Chávez’s repeated threats to “cut off” oil shipments to the US.

The Southern Command analysis cautions that the extension of state control over energy production in several countries is deterring investment essential to increase and sustain oil output in the long term.

“A re-emergence of state control in the energy sector will likely increase inefficiencies and, beyond an increase in short-term profits, will hamper efforts to increase long-term supplies and production,” the report said. So far this year, Venezuela has moved to double the level of taxes levied on oil production units operated by multinationals, Bolivia has nationalised its oil and gas fields, and Ecuador has seized several oilfields from Occidental Petroleum, the largest foreign oil company in the country.

The report also noted that oil production in Mexico, which faces elections next weekend, is stagnating be-cause of constitutional re-strictions on foreign investment.

Latin America accounts for 8.4 per cent of daily world oil output, according to the US Energy Information Administration, but energy supplies from the region make up 30 per cent of US energy imports, or about 4m barrels a day.

Mexico, Venezuela and Ecuador are the region’s largest exporters of oil and refined products. Brazil, Argentina and Colombia also produce oil, although predominantly for domestic consumption.

That the US Southern Command, which oversees military relations with Latin America, has embarked on a detailed study of the subject underscores the view that energy has become a key facet of US national security.

“It is incumbent upon the command to contemplate beyond strictly military matters,” said Colonel Joe Nuñez, professor of strategy at the US Army War College in Carlisle, Pennsylvania.

An exception to the trend, the Southern Command study noted, is Trinidad & Tobago, whose policy of opening its doors to foreign investment has allowed it to become the top supplier of Liquefied Natural Gas to the US. Analysts have warned that, while the wave of resource nationalism in Latin America is allowing governments to grab a greater share of the energy price boom, tighter control will curb output in the future if, or when, oil prices fall.

“Pending any favourable changes to the investment climate,” the Southern Command study concluded, “the prospects for long-term energy production in Venezuela, Ecuador and Mexico are currently at risk.”

Copyright The Financial Times Limited 2006