1964 Odell Oil and State in Latin America

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Oil and State in Latin AmericaAuthor(s): Peter R. OdellSource: International Affairs (Royal Institute of International Affairs 1944-), Vol. 40, No. 4(Oct., 1964), pp. 659-673Published by: Blackwell Publishing on behalf of the Royal Institute of International AffairsStable URL: http://www.jstor.org/stable/2611731

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OIL AND STATE IN LATIN AMERICAPeter R. Odell

THE economicignificancef the oil industryn LatinAmericavaries rom ountryocountry uttherere three spectswhichshould e particularlyoted. The firsts the utstandingtatus f

Venezuela s an oil producingnd exportingountry.t nowstands

thirdn importancen world roduction-havingecentlyeenpushedout of secondplaceby the SovietUnion-but t remains heworld'sleading xporter f crudeoil and oil products nd has the largestagglomerationf resource-orientatedefineriesfanypart ftheworldoutside heUnited tates.

Secondly,heres thefactthat n mostother ountriesf LatinAmerica here s either roductionf or explorationorpetroleum.Colombia nd Trinidad bothgeologicallynd economicallyelated

to neighbouringenezuela s faras oil is concerned)roduce il forexportwhileMexico,Peruand Argentinaatisfyheir wnrequire-mentsfromdomestic roduction.Elsewhere here s either omeproductionr at leastexplorationfan activekind.

The tihirdspect to note is thatpetroleumroducts old anincreasinglyominatingositionn thesupply f energyhroughouttheregion.Theynowprovide ver75 percent.ofthe totalenergyrequirement.

As a result fthese ndother evelopmentshepetroleumndustryconstitutesheprincipalxtractivendustryn Latin America: t isone of the mainmanufacturingndustries,ith81 refineriesitheroperating,nder onstructionr projected: nd it is thebasis forenablingconomicxpansiono go ahead.

But an examinationf the oil industryn LatinAmerica s verymuchmorethanan exercise n industrialconomies.In that theindustrys dominatedby oreignompanies hose perationsre nter-

national n characternd mainlyAmericann ownership,here sinevitablyerious olitical onflictetweenhese ompanies nd thenationalisticatin American nvironment.he industrympingeson thepoliticalndeconomicife f LatinAmerica o such degreethat ts problems ecomeentangled ithmoregeneral roblems-such s relationshipsith heUnited tates nd questions f foreignaid and nvestment-thatlacethecontinentn a specialposition nthe nternationallane.

659



660 INTERNATIONAL AFFAIRS

There are three major issues which demand investigation. First,there re issueswhich rise between he major international etroleum

companies such as Esso, Shell, Texaco) on the one hand and theLatin American governments nd their state oil companies on theother. Secondly,thereare issues which arise from the interests fthe United States n Latin Americanoil and the attitudewhich t hasadoptedtowardsthe ndustry.And thirdly,here re issues concerningtheplace and role of theoil industryn the moves that re beingmadetowards conomic ntegrationn Latin America.

* * *

Relationships betweenLatin Americangovernmentsnd foreignoil companies are complex, but one event stands out as the mostimportant ntecedentn helping o explaintheexisting ituation. Thisevent s the 1938 expropriationf theoil companiesbythe GovernmentofMexico.

In his recentbook on Mexico, ProfessorVernon of the HarvardBusiness School commented n the Mexican oil expropriationn thefollowing erms:

The conflictranscendeduestions f rights nd wrongs:the strugglessimply epresentedclashbetweenwo differentrders aving ifferentnorms nd differentystemsf values.'

In spite of the fundamentalhangesthat have takenplace since 1938in theattitudes nd behaviourof theoil companiesto the countriesnwhich they have their operations in matters uch as the paymentof royalties nd taxes,theemploymentnd conditions f employmentof local staff, he degree of profitremittances,he attitudetowardslocal capital participationn oil enterprises,tc.), it stillseemspossiblethat a historian f the 1960's may be able to use identicaltermstodescribeoil industry-governmentelationshipsn maltycountries nLatin America.

Such an explanation ould be given,for example,to accountforthe 1963 decision of theArgentine overnmento revoketihe xplora-tion and developmentontractswhich ts predecessor ad signedwithprivateoil companies n theperiod from1958 to 1961. The technicalsuccess which followed the contractual arrangements, uch tha-tArgentinachievedself-sufficiencyinoil supplies fter lengthy eriodof heavy foreign xchangebills for imports,was unimportant. hefactthat the contracts tillhad long periods to run beforetheyweredue to expire was of no account in a situation n which there wasfundamental ntipathy o foreign il interests.There were 'different

1 The Dilemma of Mexico's Development. By Raymond Vernon Cambridge,Mass.:

HarvardUniversity ress. 1963), p. 76.



OIL AND STATE IN LATIN AMERICA 661

orders(havingdifferentormsnd systemsf values andout wentthe private oreignompanies,ot becausethey ailed o deliver he

goods but becausetheirverypresence ffendedational rideandaspirations.It would eem hat uch s also thecasein Brazilwhere uccessive

governmentsavebroughtheprivateoreignector ftheoil industryunderncreasinglyffectiveverall overnmentirect-ionndcontrol:controlver he xpansionfrefiningapacity;ontrolvermarketing;controls verprices nd overprofit emittances,nd so on. Eventhough he industryan argue verypersuasivelynd logically hatgreater reedomnd greaterpportunitiesorprivate oreign apitalinoil developmentould ead to a reduced utflowf scarceforeignexchangeormportedil, ndthat heyould lso release significantamount fscarceocalcapital hat urrentlyoestofinanceetrobras'expensivexplorationnddevelopmentctivities,he ogma f petroleoe nosso' preventsny objective eappraisalf thepossibilitiesy anational pinion hichsunable o udge he ituationn such conomicconsiderationsinhe ight f tsbelief hat he nternationalil industryis an imperialisticligopolynxiousonlyto bringBrazilunder ts

tutelage.The future istorian ightlso be able to arguethat he expro-

priationftheprivateil refineriesnCubareflectedn inabilityftheCastroGovernmentnd theoil companiesven to start alking hesame anguage. evolutionaryhangenCubahadproducednattitudein which hecountry as throwingffherdependencen theUnitedStatesand on all institutionsssociatedwith it. Within uch asituationubaobviouslyequiredodecideforherself hencehould

comehersupplies f oil. The argumentsfthecompanies oncernedthat heyhad not builtrefinerieso operate n Soviet rude or,forthatmatter,nyone lse's but their wn)wereirrelevant,ortheyfailed o recognise hatCuba consideredo be hernational nterestin the samewaythatthe oil companiesn 1938 failed o recognisewhatMexico considered er national nterestso be. Companiesandthegovernmentad differentormsnd systemsfvalues andexpropriationhus ecame he nly ossible olution.

Evenmorerecently,n Peru, heconflict etween hegovernmentandStandard il of NewJersey'subsidiaryompanys more unda-mentalhan meredifferencen interpretationf a 40-year-oldgree-ment.The company,n theone hand, laims he nviolabilityf anagreementreely egotiatedetween he parties. The government,onthe ther and, efusesoaccept hat n agreement-reachednderwhatthey onsiderto be pressures f an economic nd political

2 Petrobrass thenational,tate-ownedil company.



662 INTERNATIONALAFFAIRS

charactern the daysof oil imperialism-hasnyrelevanceo thepresent-dayituation.Here again s another otential exico, rising

notfromhedeliberatentransigencef either overnmentr companybutfromhefact hat he conflictranscendsuestionsf rightsndwrongsnd representsclashbetweenifferentrders nd outlooks.

Argentina,razil,Cuba and Peru-theseare the countries heregovernment/foreignilcompany elationshipsavehit heheadlinesnrecent ears.But what f therest f LatinAmerica? s it free romactual or potential onflict etween tate and privateforeign ilinterests?

In somecountries-notablyruguay nd Chile-the absenceofconflictndicates he achievementf stable and effective orkingrelationshipsetweentateand private ompanies. n Uruguay heexistencef a statemonopoly ver mportsf petroleumnd in therefiningndustryeaves the private oreign ompanieswith imitedfunctionsn the internal istributionf productswith governmentcontrol ver heprice evel fmost fthese.The degree f governmentinterventionn the ndustrys thus o complete hat hepossibilityfconflictetweentate nd companies ardly xists.

There s a similarituationn Chilewhere hefirstmonopolyawrestrictingil industryevelopmento thestatewas passed n 1927.In contrasto later vents n Mexico,Chile'sdecision t tihat imecreated o storm f protestmong he oil companiesr theUnitedStatesbecausetherewas no existing rivate ssetswhichhad to benationalised. ll theprivateompaniesostwas the xpenditurehichthey ad ncurredn the woprevious earsn some imitedeologicalexplorationor il-theresults f which ad encouragedhemoapplyforconcessionsn the southern artof thecountry. oday theresno questionf anychange n thegovernmentonopolyverexplora-tion, productionnd refining. he possibilityf some formofpartnershipetweenENAP (the state company) nd the privatecompanies-most ecentlyanvassed n connectionwith the newrefineryt Concepcion,here he om,panieseemed reparedomeettheforeignxchangeosts nvolvedn returnora guaranteedutletfor heirrude il-is outof the uestions ENAP is legally revented

from nteringnto such arrangements. o politicalpartyof anysignificancenthe ountryasbeen, r s,preparedo nitiateegislationdesignedo change he situation. ven in marketinghesystemsdirectlyontrolledy the tate,which otonlyregulatesheprices fproducts,utalso restrictshe sale ofmajorproductso three om-panies-EssoandShell,which ave beenmarketingil in thecountryfor 0years,ndCOPEC, a locally wned rivate ompanyormedn1935. In order o ensureCOPEC's success gainstts international



OIL AND STATE IN LATIN AMERICA . 663

competitors,he state ponsors quota system f marketing,he overalleffectfwhich s to giveCOPEC half thebusinesswiththe remainder

dividedbetween he other wo companies. Thus, the state s dominantin the oil businessand Shell and Esso are apparently ontent o 'jogalong' in a protectedmarketwhich nsures he profitability,ut whichgives thempracticallyno independencewhatsoever. Their productrequirements-formerlymported from Venezuela and Peru-aregraduallybeing met fromChilean, state-producedrudeoil, and it isprobably only a matterof a few years before they are completelydependent n ENAP-which also seemslikely ventually o take overresponsibilityorsupplyinghe product equirementsf certainminingcompanies, irlines nd a few otherdesignated arge consumerswhichat the momenthave theright o put out theirrequirementso inter-nationaltender.

Essentially, herefore,ruguay nd Chile can be classed along withMexico as far as statecontrolover the oil industrys concerned-theinternationalompanies annotprovide cause ofconflict ith he gov-ernments. n the otherhand,in a fewLatin Americancountries heabsenceof conflict etween il industrynd state risesfrom he absenceof governmentalnterestnd concern. This has been the case in thesmall countries f CentralAmerica. In El Salvador,forexample,thegovernmentccepted orderly'marketingor over40 yearsand madeno attempt o interfere,y means of import ontrols r controls verretailprices, n a situationn whichEsso had a monopolyof fuel oilsales, and for otherproductscompetedneither n price nor servicewithChevronand Texaco-the other two marketers.The local com-panies acceptedproducts rom heirparentcompaniesat prices which

thelatter hose. This verycomfortable ituation or the threeUnitedStatescompanieswas recently pset,not by governmentntervention-whichwould certainly ave been justifiedn the interests f reducingenergy osts in thecountry-butby the decisionof Shell to enterthemarketn 1960. Shell'sentry as introducedn element f competitionforthe first ime n themarket orfueloil and has led to strugglesoroutletsforboth gasoline and diesel oil sales. Profitmarginsof themarketingompanieshave been squeezed to theadvantageof thecon-

sumer s a resultof both lowerpricesand improved ervicestations.However, the more competitive osition inside El Salvador has

not yethad muchimpacton thecountry's oreign xchangecosts foroil importsbecause Shell and Esso 'buy' crude oil for theirnewjointlyowned refineryrom associated companies in Venezuela atCaribbeanposted prices. El Salvador has notyetbenefited romtheavailabilityfcrudeoil supplies t pricesdiscounted rom hosepostedby thecompanieswhichown the local refinery.The governmentas




remainedndifferentothe situation-somuch n fact, hat t omitteduntil hevery astmoment,nd until romptedy thecompanies on-

cerned, o substitutexciseduties n theproductsfthe ocal refineryfor he mport uties ormerlyevied n the mportsf products romoverseas efineries.hese xciseduties-needed oprotecthegovern-ment'srevenue-are even now only collected n the basis of atemporaryaw which as to be renewedvery 0 days. The govern-ment,moreover,ailed ntilMay of thisyear o granthe ocalrefineryany protectiongainst mported roducts. n El Salvador, herefore,one found heunusual ituationfShell ndEsso seeking o persuadethegovernmentotake n increasednterestnthe ctivitiesftheoilindustry!

In Central merica ne gains he mpressionhat hegovernmentshave had neither hestrengthorthenecessaryxpert nowledgeoconstrainhe ctivitiesftheprivate oreignil companies.However,conditionsreperhaps hanging,s is shown nthe ase ofCostaRica.In 1942thegovernmentbandonedtsmonopolyvergasolinemarket-ing. Since hen he ndustry-representedyfive ompaniesntotal-has enjoyed heright o import nd distributeetroleum roductswithout overnmentnterferencexcept overmaximum rices forgasoline:hardly significantontroln that hegovernmentccepteda build-upf these rices rom hebasisofhighU.S. prices or rudeoil in theGulfof Mexico. From thispeaceful ituation, owever,there asdevelopedver hepast woyears n increasinglycrimoniousargumentetweenovernmentnd industryrising rom roposals obuild refineryn thecountryo match imilar evelopmentsn theotherCentralAmerican epublics.Until1962it seemed hatthere

wouldbe agreement;tohe onstructionfa refineryn the ountryyTexaco-one ofthe hreemainmarketingompanies.This U.S. com-panywasgrantedherighto build herefinery: decisionwhich heother womainmarketingompanies-EssondShell-were reparedoaccept or hey adrefineriesnder onstructionlsewheren CentralAmerica ndwere hus n a positiono negotiate,t an internationallevel, satisfactoryroduct xchange rrangementsuch that theirinterestsocallywouldbe fullysafeguarded. owever, exaco'sright

tobuild ndoperateheCostaRicanrefineryas rescindedn 1962bythenewly lected overnmentfFrancisco rlich, nd the concessionwas latergiven-withoutny opportunityor the othermarketingcompanieso submit ffers-to lliedChemicals hose il subsidiary,theUnionOilCompanyfTexas,had no othernterestsnCostaRica.

This action eems ohave been deliberate ove gainst he ocalcompaniesf the nternationallyntegratedompanies, articularlysAllied hemical'sefineryas, n effect,eengrantedomplete onopoly




rights o the supplyof products hroughouthe country y means ofhigh duty protection gainst mports. This is a bad enoughblow in

itself o the marketingompanies used, of course, to takingproductsmade from rudeoil producedby theirparentcompanieselsewherenthe world)but in additiontheyalso visualise the elimination f theirlocal marketing rofitsfor, on the one hand, the government asinsisted hatthere hallbe no increases n thepricesof products o theconsumers, hile on theotherhand the marketing ompanieshave notbeen guaranteed he ex-refineryrices of the productswhich theywillhave to purchasefromthe Costa Rican refinery.They seem to 'feelthat thesearrangements ill undermine heir

profitability,articularlyas theyhave to meet higher nternal ransport osts in moving theproducts rom herefineryn theCaribbean coast to themain centreof consumptionn the San Jose area. The government as declinedto offerny helpto theforeign ompanies nd has said that t is theirresponsibilityo sit down withtherefiningompany o workout ques-tions of pricesand supply arrangements.

The increasingly ostileatmosphere etweenthe stateand the oilcompanies n Costa Rica has been furtherxacerbatedby the claimofthegovernmenthatthecompanies'recent enewals f their1942rightsto imprort asoline are not valid as they lack the approval of theLegislativeAssembly-approvalwhich hecompanies rgue s not neces-saryundertheexisting osta Rican law. As a result f thesedevelop-mentstherenow seems to be a situationof mistrust nd suspicionbetween the establishedforeignoil companies and the government,and there s some feelingn the formerhattheir liminations but amatter f time-by expropriationr byothermeans-with a monopoly

of marketing ltimately oingeither o the government irectly r tothe refining ompanyin which the state will eventually cquire aninterest. At the momentthe companiescan do nothingbut wait-hoping, erhaps, or changeofgovernmentn 1966to bring renewedpossibilityf co-operation. In themeantime ll investment y theoilcompanies in the countryhas been ended and state-oil companyrelationshipsn Costa Rica seem likelyto deteriorate ather han toimprove f construction f the Refineria Costarricense s continued

under the present oncessionarrangements.* * *

In all the countriesconsideredso far the oil industry, houghimportant ecause it providesthe major source of energy, s not adominating eatureof the politico-economicnvironment.But whatof the situation between state and foreigncompanies in the twocountriesf LatinAmerica-Colombia and Venezuela-where oil is of

thegreatestelativeignificancen the

economicnd

political ramework?




In Colombia-in spiteof an estimated 0 per cent.contributionby theoil companies o totalgovernmentevenues,nd in spiteof

oil's position s the secondmost mportantoreignxchange arner(about 15 per cent. f thetotal)-theoverridingmpressions one ofan absence f governmentalnd public nterestn the ndustryxceptin so faras it is the mainsupplier f domestic nergyequirements.Thus it lies within sector f the economywhichwill slowlybutinevitablye brought nder tate ontrol nd ownership. his willbeachieved y acts such as thegradual xtension f the activities fEcopetrol-the tate oil company-and by rigidcontrol ver theprices of all petroleumroducts. The privateforeign ompaniesoperatingn this ector re thusbeing queezed oth n theextent ftheir perationsnd in their egree f profitability.

TheColombianil industryn ts nternationalontext,n theotherhand, eemsngeneral o sufferrom lack of anypositive overnmentpolicy r evenencouragement.hough he egalframeworkor theoperation nd developmentf oil concessionsn Colombia s verycomplex here eems o be at least general greementhat he 1961Oil Law is less favourablehan ts 1934 predecessoror attractingexplorationnd developmentfforts.This arises particularlyromchanges n thebasis bywhich epletion llowances re computed,othatno one seems o be very ertain s towhat heoverall ffectnprofitabilityillbe. In addition, new nterpretationy theMinistryofFinance f theregulation'soncerningheoil exchange ate seemslikely o put an additionalqueezeon thecompaniesnterestednexportingil.

Partlys a result fthese onsiderationswooftheold-established

companiesn Colombia-Mobil nd Shell-haveceasedtheir xplora-tionand developmentork nd are engaged nly n depletingheirexistingields. This attitudeppearsnot tohavearoused ndue on-cern in governmentircles;neitherhas the state taken mucheffectivectionnprocessingew pplicationsor oncessions-ofome350 applications,ttractedrincipallyy a good generalnvestmentclimate,nly handful ave so farbeenconsidered.Thusgovern-mentalndifferenceo thepossibilitiesf theoil industryncreasingts

contributiono thenational roductnd,moreespecially,o exportearningseems ikely o ensure hat hecountry ill miss a goldenopportunityodeveloptsresourcesta timewhenmany ilcompaniesare anxious odiversifytheirperationsntothe Westernemisphereas a hedge gainstooheavy dependencenother arts ftheworld.The success f theTexaco-Gulfevelopmentn the extremeouth fthe ountryin an area, ncidentally,onceded nder he1934oil lawwith lowroyalty bligation)may temporarilyide the need for a




fundamental hangein the attitude f the ColombianGovernmentothe nternationalil industryf thepossibilities f thecountry ecoming

a much more important il producer nd exporter re to be realised.Paradoxicallyperhaps,relationships etween il industry nd stateseem to be at their best in Venezuela-a far cry fromthe anti-oilcompanyattitudes hatone mighthave expectedfroma governmentcontrolledby the Accion Democratica, a party formerly ledged toeliminate oreign ontrolof the country's il. An examination f thereasonsforthis developmentwould go well beyond the scope of thisarticle, utthey eem to arise n large partfrom heprofessionalismftheVenezuelan Governmentn oil matters nd from a cards-on-the-tableattitude ybothgovernmentnd companies-at leastin private fnot in public-in the period since 1961.

Essentially, t seems possible to argue that by the timeAccionDemocratica came to form he governmentn 1959, the opportunitiesfor any revolutionaryhange n the structure f the oil industry erealmost non-existents a result of the decline in the comparativeadvantage f Venezuelanoil in mostworldmarketsn faceofincreasedcompetition romthe Middle East and fromnew sources of supply.

On the otherhand, the companiesdid notparticularly ish to risk theloss of their investments y action which would alienate *thenewgovernment, espite their suspicions of its intentions n the light ofpreviousexperiencewith Accion Democratica n the late 1940s when,according o Edwin Lieuwen, t pursued aggressive tactics o increasethe nation's share in the profits f the oil industry'and enforcedpolicy which led to a 'menacing rise in productioncosts .3 Thecompanieswere also influenced n theirdecisionsto take no really

decisivesteps againstVenezuelan oil by the U.S. State Department'sevaluationof Venezuela as the keyto stability n theCaribbean areaand possibly throughoutatin America. Thus, both theVenezuelanGovernmentnd theoil companieshave had a real interestn maintain-ingthestatusquo-though both, n fact,have taken variousmeasuresto protectwhatthey onsider o be their ongtermnterests.

Thus,theoil companieshave restrictedheir fftakeo a ratemuchbelow the growth n world demand and have greatlyreduced their

exploration nd development fforts.The government,n the otherhand,has introduced stringentonservation olicy. It has attemptedto prevent he sales of Venezuelan oil overseas at prices discountedmore han10 percent.from heposted price. And it has sought-,andobtained-a special relationshipwith theUnited Statesin the latter'soil importprogramme o that Venezuela is now guaranteed priorconsultation eforethatprogrammes changed.

3 Venezuela. By Edwin Lieuwen, p. 96. (London, New York: O.U.P. for R.T.T.A

1961. Reviewed n International bfairs, uly 962, p. 442.)




Neither he actions f thecompanies orthose f the governmenthave,however, ade confrontationecessarynd in thisperiod oth

sides ppear o havetaken ositive teps ore-evaluateoth heir wnand theirpponent'sositions.Outof thishas emerged nderstandingin government/companyelationshipsased on an appreciationfcertainreasof mmediate utual nterests far s Venezuelanil isconcerned.However, he teps aken othby thegovernmentndbythe ndustryeem to representacticalmovesdesigned o secure heshort-termuture.The presentituations perhaps ne of equilibrium-but onlyof unstable quilibrium-whichaybe upset t any timeeitherby designor by miscalculation. he underlyingeelingnVenezuelafortheeventual ecessityf a muchgreater egreeofindigenous enezuelan ontrol verthe oil industryn thecountrymightbe satiatedby actionshortof expropriation-crudeandineffectiveeapon ejected s a pointlessolutiony mostVenezuelanopinion-but nyaction aken ouldfacethe nternationalompanieswiththeir greatest atin American hallenge ince the Mexicannationalisationf 1938. The companies,n theirpresent orm,nVenezuela restill cceptednly s a necessarynd temporaryvil-

thecurrentnderstandingybothparties f the facts f Venezuelanoil's uncompetitivenessn a highly ompetitiveorld oil situationshouldnot be allowed o mask themorefundamentalealityf theincompatibilityf Venezuelan ationalism iththepresent olitico-economicrganisationfher asic ndustry.

Thus, throughoutatinAmerica ne finds t bestan attitude findifferencend at worst n attitudef mistrustr evenhostility-either ctualor latent-towardshe nternationalil industry.And

theseattitudes,t sihould erhapsbe pointed ut,owe nothingoCommunistnfluencef anytype-oneor two of thestate ompaniesmayhave flirted ith he deaofco-operationith heSovietUnion'soil ndustryver he astfive rsixyears utnothingignificantas comeoutof thisexceptn thevery pecialcase of Cuba, and eventheretherere ndicationsfa revival f contacts ith heEuropeanfnotwith heU.S. sideof the nternationalndustry.t seemsnotbeyondthebounds f possibilityhatCuba will turn o European ompanies

for t leastpart fher rude upplyndpossiblyor he xpertisendequipmentequirednbuildingernewrefinery.

The attituden manyLatinAmerican ountriesowards heoilindustryesembles,n fact, he attitudef manyEuropean ocialistparties owardshepublic ector f theeconomy. n the samewaythat heBritishabourParty-stressingheneedfor hecommandingheights' f theeconomyo be under ublicownershipnd control-has broughtr intendso bring, oal, gas, electricity,oad and rail




transportndsteel nto hepublic ector, o LatinAmericanountriesseetheneedfor heir il ndustrieso be directlynder tate ontrols

one ofthecommandingeights f aboutevery conomyn theconti-nent. Thus,relations etweenhe nternationalil companiesnd thecountriesf Latin America resent erious nd continuingroblemsfor he mmediateuture.

* * *

Whatof the ssueswhich rise from he interestsf theUnitedStates n Latin American il? Becausetheprivate il industrynLatin America s principallymenicanthe only mportantxception

beinghenterestsf he hellGroup) tsproblemsre, nsomemeasure,partof the general risisof confidence hich existsbetween heUnited tates and thecoun-triesf LatinAmerica. But there reaspects f United tatesLatin American conomic olicywhich reeither eculiar o theoil industryr of particularignificanceo it.The most mportants the attitude f theU.S. Governmentowardsthe stateoil companies.UntilrecentlyheUnited tates efusedomakegrants r loansto nationalisedil companies-a policy pecific

toLatinAmerica ecause uchcompanies equiringinancialelpdidnot xist lsewherentheworld. Therefusal f such id was on thegroundshat ufficientrivateapitalwas available or hedevelopmentoftheoil industrynd that t was not n the nterestsf theUnitedStates o encouragesocialistic' ractices.But thispolicywas speci-fically ied to oil, for theUnited tatesdid give aid to other tateenterprises-includingrojects s basic as ironand steelplantsforwhich,tcould lso be argued,rivate oreignapitalwasalsoavailable.

ThisUnited tates ttitude as tbeen sourceof suspicionn LatinAmerica ecause t seemed o ndicatehat heU.S. Governmenttoodofficiallyehind ts private il companies nterestedn exploitingLatin American il but whosecapital was not acceptable o manycountriesithn ntenselyationalisticutlook owardshe il industry.

The basis of this policy,which was rigidly pheldundertheEisenhower dministration,as, however, ncreasinglyuestioned.Thus, n 1960,SenatorAiken eportedfter fact-findingission o

several atinAmerican ountries:There re manyways n which he U.S. could aid Brazilian evelop-ment . . For example,f Petrobras ad additional apital o expandits productionmore rapidly,material oreign xchange avings ouldbemadethrough reductionnforeignil imports. he refusalo dealwithPetrobras implybecause it is a government onopoly eemsaltogetheroo doctrinaire.4

4 Report of Senator G. D. Aiken on a Study Mission to Latin America to theU.S.Senate Committee n Foreign Relations, p. 8. (Washington: U.S. GovernmentPrinting ffice, ebruary , 1960.)




A fewmonths ater, enatorMorse also wroteof Brazil:

One particular olicywhich feel s mistakens the adamant efusal

of thegovernmentven to consider ublic oans to Petrobras.Theposition s taken on the narrowdogmatic rounds hatpetroleumdevelopmenthould e carried ut by private apital nd that tcouldbeandwouldbe ifBrazilwould change ts own policyof purely ublicdevelopment. owever, hisposition gnoreshefacts hat t is Brazil'soil and Brazil's policywhich re involved nd ,theAmerican ttitudelendsgreat redence o theBrazilian harges f economic mperialismand intervention.5

In additionto this specific hallenge to the then existingpolicy in

Brazil, Senator Morse also wrote of the general mpact of this policyin Latin America.

We needa less doctrinairepproach o thequestion f publicversusprivate enterprise n extending conomic assistance. The presentdistinctionmacks of economic nterventionn a country's nternalaffairsnd violalteshefreedomfa countryodevelopts wnresourcesin its ownway. This is particularlyrue n respect f loans foroildevelopment.Whother e like ilt r not,the fact s thattheview sstrongly eld n manyplaces in Latin America hat he American ilcornpanieso influenceurforeignconomic olicy hat heyre abletoblockany request ora foreignid loan to a governmentil projectabroad.6

The earlierrigidity f the U.S. policy has been relaxed to somedegree since 1961 under the Democratic Administration.Export-ImportBank loans have been made to financesales of Americanpetroleum quipmento Y.P.F. and Y.P.F.B-the stateoil mono-polies inArgentinandBolivia respectively.But too muchsignificanceshould otperhaps e read nto his. Thechangenpolicymight ell

havebeenmadeprimarilyo enableU.S. equipment anufacturersocompetewith heir uropean ivals or ales n LatinAmerica atherthanbecauseofany really undamentalhangen theattitudef theUnitedStatestowards tateoil enterprise. he financialssistancewas onlyforequipment-notforgeneral xploration nd developmentcosts such as stateoil companiesneed if theyare to move forward.The real test may well come in Argentinawherethe employmentfprivateontractorsoproduce il forY.P.F. hasrecentlyeenrejected

by thegovernmentnd all the contractserminated.f Y.P.F. is tobe successfuln increasingutputwithouthe helpof foreign rivatecompanies,t will oon havetolook for oansandtechnicalssistancefrom riendlyoreign oyernments.hat occasion ould wellbe themoment f truth orAmericanpolicyon this ssue,.

5 Reportof SenatorW. Morse on a StudyMissionto South America o theU.S. SenateCommittee n Foreign Relations, p. 28 (Washington: U.S. Government rintingOffice, ebruary 0, 1960.)

6 Ibid. p.7.




A second spect f U.S. economic olicy owards atinAmericanoil arises from problem lreadymentionedn connection ith

Venezuela's ndustry. his is the question f the attitude f theUnited tates owards mportsf strategic aterial-ofwhich il isconsidered o be one-fromthe WesternHemisphere. AlthoughVenezuelahas beenguaranteedrior onsultationeforehanges remade in tiheU.S. oil import rogramme,he did not get what shereallywanted:either arity f treatmentithCanada and Mexicowhoseexports f oil to theUnited tates re not subjected o theofficial uotas or, alternatively, country-of-originuota wherebyVenezuela s guaranteed steadily isingmarket or her oil in theUnitedStates rrespectivef competitionromotherpartsof theworld. The guaranteef consultations small onsolation ecause tdoesnothingoensure hatVenezuelawillhave theoutletswhich heneeds o maintain4 to 5 per ent. er nnumncreasen production-theminimum ate of increasewhich s neededto underwritehecountry'smbitious evelopmentrogramme. ontinued tabilitynVenezuelamaywelldepend n suchan increase n productioneingachieved,nd theUnited tatesmaybe obliged ore-assess erpolicy

in the interestsf hemispher-icolidaritygainst urther ommunistadvance, nd in spiteof the oppositionhatsuch a movewouldarouse mong he nternationalil companies. These companies onot ike being iedby quotato anyoneparticularourcebecauseoftheimpact hishas on theflexibilityf their nternationalradingpatterns.

* * *

In conclusion want oexamine rieflyhethirdetof ssues on-cerning il and state n Latin America-theplace and role of theindustryn the movementowards egional conomic ntegration.7Here, perhaps,we move on from hecontroversialroblemsf thepresento whatwill probably e equallycontroversialroblems fthe uture.

Although rgentinaas ately roposed he ettingpofa 'commonoil market'amongthoseLatin American ountrieswith state oil

industries,t themoment il is playing o part n the steps owardsintegration.n fact, hestatutesf the Latin American ree TradeAssociationpecificallyxcluded il from heregional rrangementsobe negotiated,hilea protocol o theCentralAmerican ommonMarket reatyaiddown hat ecisionsntradenpetroleumroducts

7 See David Huelin, EconomicIntegrationn LatinAmerica-Progress nd Problemsin InternationalAfjairs,July 1964, pp. 430-439, for a recentappraisal of theintegrationrogramme.




wouldhaveto await pecialnegotiationso be initiatedo that gree-ment ouldbe reachedwithin iveyearsof theTreaty nteringnto

force.Thenegotiationsavenotyetbeen nitiated.Oil,or ratherhe nfluencefoil, has, n fact, reated stumblingblockto theachievementf economicntegration. his has arisenfrom enezuela's ailureo joinL.A.F.T.A., argelys a result ftheimpact f theoil industrypon tseconomy.Generalwage evels nVenezuelahave risentowards hose n theoil industry,o makingits other ndustriesncompetitiveithproducers f similargoodselsewherenthe ontinento the xtenthat ariffrotectionouldnot

be removed. Venezuela's bsencefrom heregional rrangements

removed he incentiveo studythe possibilitiesf regional elf-sufficiencyn oil in spite fthefollowingonsiderations:hat egionalself-sufficiencys themost mportantspectof the integrationro-gramme;hat il s oneofthefew ommo;ditieshat srequiredn argequantitieshroughouthe rea; that il is traded hroughoutheconti-nentwith rospectsf a continuingnd rapidly xpanding arket;hatoil is available n sufficientuantities ithinhearea to covertotalneedsfortheforeseeableuture;nd that,n spiteof regionalvail-ability,il from ther roducingreasof theworldhas moved ntoLatinAmerican increasinguantitiesn recent ears.

Indeed, il is so vitaland so basicto all thecountriesf LatinAmericahatt s unrealistico maginehat he il industryanremainoutsidethe developingegional rrangementsr thatthe regionalintegrationanbe successful ithouthe nclusionfoil. The recentindicationy Venezuela's ewPresidentPresident aul Leoni) thathiscountrylans o ointheFreeTradeAreaand thatnegotiationso

thisendwillshortlye initiateduggestshat hequestion foil inLatinAmericanegionalrrangementsillreceivemuchmore ttentionin thefuturehan thas in the past.

But the radingndorganisationfLatinAmericanilon a regionalbasis is unlikelytobe achievedwithoutome formal egional odywhichouldultimatelyevelopnto LatinAmerican il Community,perhaps n the linesof theEuropeanCoal and SteelCommunity,wherebyarticularttentionasgiven t an early tagenthe ntegra-

tionprogrammeobasicsectorsf theeconomiesf theparticipatingnations.

Mexicomaywellrevive he nitiativet took fewyears gowhenits tate ilcompany,emex,held series fmeetingsith henationaloilcompaniesfseveral ther atinAmericanountries.Outofthesemeetingsamepaperdecisions or oint nvestmentn petro-chemicalsbyArgentinand Mexico. Braziland Mexicoplanned o exchangeinformationnd technical ssistancen various aspectsof the oil




industry. Bolivia and Mexico planned ointproduction f lightcrudeinBolivia to be used in conjunctionwithMexicanheavycrude oil in a

refineryn thewest coast of Mexico. None of theseagreements asproduced nyresults, utthey o seemat least to provide n indicationofpossiblefuturerends-trendset outby theDirector fPemex n thefollowingerms:

Eventually y future nvestmentsnd by joint operations he sixLatinAmericanountriesMexico, eru,Venezuela, razil,Bolivia ndChile)willform blocktto efend -he ommonMarket. t willbe aninternationalonsortiumo protect reeLatin Americafromforeignoil monopolies.8

The growth f regional rrangementsoroil in Latin Americawill,of course, change the local environment or the international ilindustry;heproblems hat heprivate il interestsurrentlyace withinthe individualcountriesof Latin America would be supersededbyproblems f a regional haracter. Such problemswouldarisefrom hedevelopmentf some form f supra-nationalontrol nd direction, otonly over tradein petroleumproductsbut also over the patterns fproduction nd refiningn theregion nd over theflowof investment

into the industry.Whether he internationalil industry ould con-tinue to work within uch an environmenteems likely to be themajoreconomic nd politicalquestion hat t will have to facein LatinAmerica n thenext decade.

Dr. Odell, a lecturer n Geography t the London School ofEconomics,s engaged nresearch n the nternationalil industry,particularlynLatinAmerica.AuthorfAnEconomicGeography

of Oil,and other ublications.

8 Froma speechbytheDirectorof Pemexat theceremonymarking hesigning f the

agreementetween emexand Y.P.F. in Argentinan 1960.

1964 Odell Oil and State in Latin America

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