The Political Economy of Oil Production in Latin America

Abstract

1990s witnessed a significant increase in investments in the oil and gas sector in Latin America. In most countries, private investment took the lead after the privatization and liberalization of the sector. In Argentina, Bolivia, Brazil, Ecuador, and Venezuela, private oil investment or some form of privatization (or both) generated significant increases in hydrocarbon production and reserves. In the last five years, however, the region has experienced a new wave of resource nationalism, with increases in the government's take and state control. Oil taxes have risen significantly in Argentina, Bolivia, Ecuador, and Venezuela. In addition, Bolivia and Venezuela have partially nationalized oil projects. We argue that the recent trend is largely the outcome of the rise in the international oil price. Furthermore, we show how the likelihood of expropriation increased after a period of successful investment in exploration and production. At the same time, the timing of these changes and direction in which the sector has evolved varies considerably across the region. In contrast to most other countries in the region, Brazil, Colombia, and Peru have generally strengthened the institutional framework and the property rights of private oil producers. This paper provides a political economy rationale for the divergent evolution.