Oil and State in Latin America

Author(s): Peter R. Odell

Source: International Affairs (Royal Institute of International Affairs 1944-), Vol. 40, No. 4
(Oct., 1964), pp. 659-673
Published by: Blackwell Publishing on behalf of the Royal Institute of International Affairs
Stable URL: http://www.jstor.org/stable/2611731
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 OIL AND STATE IN LATIN AMERICA

T
Peter R. Odell

NHE economicsignificance of the oil industry in Latin America

variesfromcountry to country butthereare threeaspectswhich
shouldbe particularly noted. The first is theoutstanding statusof
Venezuelaas an oil producing and exporting country.It now stands
thirdin importance in worldproduction-having recentlybeenpushed
out of secondplace by theSovietUnion-but it remainsthe world's
leadingexporterof crudeoil and oil productsand has the largest
agglomeration of resource-orientated refineries of anypartoftheworld
outsidetheUnitedStates.
Secondly,thereis the factthatin mostothercountries of Latin
Americathereis eitherproduction of or exploration for petroleum.
Colombiaand Trinidad(both geologically and economically related
to neighbouring Venezuelaas faras oil is concerned) produceoil for
exportwhileMexico,Peru and Argentina satisfytheirown require-
mentsfromdomesticproduction.Elsewherethereis eithersome
production or at leastexploration of an activekind.
The tihirdaspect to note is that petroleumproductshold an
increasingly dominating positionin the supplyof energythroughout
the region.Theynow provideover75 per cent.of the totalenergy
requirement.
As a resultof theseand otherdevelopments thepetroleum industry
constitutes the principalextractive in
industry Latin America: it is
one of the main manufacturing industries, with81 refineries either
operating, under or
construction projected:and it is the basis for
enabling economicexpansionto go ahead.
But an examination of the oil industry in Latin Americais very
muchmore than an exercisein industrialeconomies. In thatthe
industryis dominated 'byforeign companies whoseoperations are inter-
nationalin characterand mainlyAmericanin ownership, thereis
inevitably seriouspoliticalconflict betweenthesecompaniesand the
nationalisticLatin Americanenvironment. The industryimpinges
on thepoliticaland economiclifeof LatinAmericato sucha degree
thatits problemsbecomeentangledwithmore generalproblems-
suchas relationships withtheUnitedStatesand questionsof foreign
aid and investment-that place thecontinent in a specialpositionon
the international plane.
659
660 INTERNATIONAL AFFAIRS

There are threemajor issues which demand investigation. First,

thereare issues whicharise betweenthe major international petroleum
companies (such as Esso, Shell, Texaco) on the one hand and the
Latin American governmentsand their state oil companies on the
other. Secondly,there are issues which arise from the interestsof
the United States in Latin Americanoil and the attitudewhich it has
adoptedtowardsthe industry.And thirdly,thereare issues concerning
the place and role of the oil industryin the moves thatare beingmade
towardseconomicintegrationin Latin America.
* * *

Relationshipsbetween Latin American governmentsand foreign

oil companies are complex, but one event stands out as the most
importantantecedentin helpingto explain the existingsituation. This
eventis the 1938 expropriationof theoil companiesby the Government
of Mexico.
In his recentbook on Mexico, ProfessorVernon of the Harvard
Business School commentedon the Mexican oil expropriationin the
followingterms:
The conflict
transcendedquestionsof rightsand wrongs:thestruggles
a clashbetweentwodifferent
simplyrepresented ordershavingdifferent
normsand differentsystemsof values.'
In spite of the fundamentalchangesthat have taken place since 1938
in the attitudesand behaviourof the oil companiesto the countriesin
which they have their operations (in matterssuch as the payment
of royaltiesand taxes, the employmentand conditionsof employment
of local staff,the degree of profitremittances,the attitudetowards
local capital participationin oil enterprises,etc.), it still seems possible
that a historianof the 1960's may be able to use identicaltermsto
describe oil industry-government relationshipsin malty countriesin
Latin America.
Such an explanationcould be given,for example, to account for
the 1963 decision of the ArgentineGovernmentto revoketiheexplora-
tion and developmentcontractswhichits predecessorhad signed with
privateoil companiesin the period from1958 to 1961. The technical
success which followed the contractual arrangements,such tha-t
Argentinaachievedself-sufficiency -in oil suppliesaftera lengthyperiod
of heavy foreignexchange bills for imports,was unimportant.The
fact that the contractsstill had long periods to run beforetheywere
due to expire was of no account in a situationin which therewas
fundamentalantipathyto foreignoil interests.There were 'different

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

HarvardUniversity
Press. 1963), p. 76.
 OIL AND STATE IN LATIN AMERICA 661

orders ' (having' differentnormsand systems of values' and out went

theprivateforeign companies, not becausetheyfailedto deliverthe
goods but because theirverypresenceoffended nationalpride and
aspirations.
It wouldseemthatsuchis also thecase in Brazilwheresuccessive
governments havebrought theprivateforeign sectorof theoil industry
underincreasingly effectiveoverallgovernment direct-ionand control:
controlovertheexpansionofrefining capacity;controlovermarketing;
controlsover pricesand over profitremittances, and so on. Even
thoughthe industry can argueverypersuasively and logicallythat
greaterfreedomand greateropportunities for privateforeigncapital
in oil development could lead to a reducedoutflowof scarceforeign
exchange forimported oil,and thattheycouldalso releasea significant
amountofscarcelocalcapitalthatcurrently goesto finance Petrobras' 2
expensive exploration anddevelopment thedogmaof 'petroleo
activities,
e nosso' prevents any objectivereappraisalof the possibilities by a
nationalopinionwhichis unabletojudgethesituation on sucheconomic
considerations -inthelightofitsbeliefthattheinternational oil industry
is an imperialistic oligopolyanxiousonly to bringBrazil underits
tutelage.
The futurehistorian mightalso be able to arguethatthe expro-
priation of theprivateoil refineries
in Cuba reflected an inabilityof the
CastroGovernment and the oil companieseven to starttalkingthe
samelanguage.Revolutionary changein Cuba had produced an attitude
in whichthecountry was throwing offherdependence on theUnited
States and on all institutions associatedwith it. Withinsuch a
situation Cuba obviouslyrequiredto decideforherself whenceshould
comehersuppliesof oil. The arguments of thecompaniesconcerned
thattheyhad not builtrefineries to operateon Sovietcrude(or, for
thatmatter,anyoneelse's but theirown) were irrelevant, for they
failedto recognise whatCuba considered to be her nationalinterest
in the same way thatthe oil companiesin 1938 failedto recognise
what Mexico consideredher nationalintereststo be. Companies
and thegovernment had ' differentnormsand systems of values' and
expropriation thusbecametheonlypossiblesolution.
Even morerecently, in Peru,theconflict betweenthegovernment
and StandardOil of New Jersey's subsidiary companyis morefunda-
mentalthana meredifference in interpretationof a 40-year-old agree-
ment.The company, on theone hand,claimstheinviolability of an
agreement freelynegotiatedbetweenthe parties. The government,
on theotherhand,refusesto acceptthatan agreement-reached under
what theyconsider'to be pressuresof an economicand political
2 Petrobras
is thenational,state-owned
oil company.
662 INTERNATIONAL AFFAIRS

character in the days of oil imperialism-hasany relevanceto the

present-day situation.Here againis anotherpotential Mexico,arising
notfromthedeliberate intransigence of eithergovernment or company
but fromthefactthatthe conflict transcends questionsof rightsand
wrongsand represents a clashbetweendifferent ordersand outlooks.
Argentina, Brazil,Cuba and Peru-theseare the countries where
government/foreign oil companyrelationships havehittheheadlinesin
recentyears.But whatof therestof LatinAmerica?Is it freefrom
actual or potentialconflictbetweenstate and privateforeignoil
interests?
In some countries-notably Uruguayand Chile-the absenceof
conflictindicatesthe achievement of stable and effective working
relationships betweenstateand privatecompanies.In Uruguaythe
existenceof a statemonopolyoverimportsof petroleum and in the
refining industry leaves the privateforeigncompanieswithlimited
functions in the internaldistribution of productswithgovernment
controloverthepricelevelofmostofthese.The degreeofgovernment
intervention in theindustry is thusso completethatthepossibility of
conflictbetweenstateand companieshardlyexists.
Thereis a similarsituation in Chilewherethefirstmonopolylaw
restrictingoil industry development to the statewas passedin 1927.
In contrastto latereventsin Mexico,Chile's decisionat tihattime
createdno stormof protestamongthe oil companiesor the United
Statesbecausetherewas no existingprivateassetswhichhad to be
nationalised. All theprivatecompanies lostwas theexpenditure which
theyhad incurred in thetwopreviousyearsin somelimitedgeological
exploration foroil-the resultsof whichhad encouraged themto apply
forconcessions in the southern partof the country.Today thereis
no questionof anychangein thegovernment monopoly overexplora-
tion, production and refining. The possibilityof some formof
partnership between ENAP (the state company) and the private
companies-mostrecently canvassed in connection with the new
refineryat Concepcion, the
where com,panies seemed prepared to meet
theforeign exchangecostsinvolvedin returnfora guaranteed outlet
fortheircrude oil-is outof thequestion as ENAP is legallyprevented
fromenteringinto such arrangements.No politicalpartyof any
inthecountry
significance has been,or is,prepared to initiatelegislation
designedto changethe situation.Even in marketing the systemis
controlled
directly by thestate,whichnotonlyregulates thepricesof
products,but also restricts the sale of majorproductsto threecom-
panies-Esso and Shell,whichhavebeenmarketing oil in thecountry
for50 years,and COPEC, a locallyownedprivatecompanyformed in
1935. In orderto ensureCOPEC's successagainstits international
 OIL AND STATE IN LATIN AMERICA . 663

competitors, the statesponsorsa quota systemof marketing, theoverall

effectof whichis to give COPEC half the businesswiththe remainder
dividedbetweenthe othertwo companies. Thus, the stateis dominant
in the oil businessand Shell and Esso are apparentlycontentto 'jog
along' in a protectedmarketwhichensuresthe profitability, but which
gives them practicallyno independencewhatsoever. Their product
requirements-formerly imported from Venezuela and Peru-are
graduallybeing met fromChilean, state-producedcrude oil, and it is
probably only a matterof a few years before they are completely
dependenton ENAP-which also seems likelyeventuallyto take over
responsibility for supplyingthe productrequirements of certainmining
companies,airlinesand a few otherdesignatedlarge consumerswhich
at the momenthave the rightto put out theirrequirementsto inter-
national tender.
Essentially,therefore, Uruguayand Chile can be classed along with
Mexico as far as state controlover the oil industryis concerned-the
international companiescannotprovidea cause of conflictwiththegov-
ernments.On the otherhand, in a few Latin Americancountriesthe
absenceof conflict betweenoil industry and statearisesfromtheabsence
of governmental interestand concern. This has been the case in the
small countriesof CentralAmerica. In El Salvador,for example,the
government accepted ' orderly'marketingfor over 40 years and made
no attemptto interfere, by means of importcontrolsor controlsover
retailprices,in a situationin which Esso had a monopolyof fuel oil
sales, and for other productscompeted neitheron price nor service
withChevronand Texaco-the other two marketers. The local com-
panies accepted productsfromtheirparentcompaniesat prices which
the latterchose. This verycomfortablesituationfor the threeUnited
Statescompanieswas recentlyupset,not by government intervention-
which would certainlyhave been justifiedin the interestsof reducing
energycosts in the country-butby the decision of Shell to enterthe
marketin 1960. Shell's entryhas introducedan elementof competition
forthe firsttimein the marketforfuel oil and has led to strugglesfor
outletsfor both gasoline and diesel oil sales. Profitmarginsof the
marketing companieshave been squeezed to the advantageof the con-
sumeras a resultof both lower prices and improvedservicestations.
However, the more competitiveposition inside El Salvador has
not yet had much impact on the country'sforeignexchangecosts for
oil importsbecause Shell and Esso 'buy' crude oil for their new
jointly owned refineryfrom associated companies in Venezuela at
Caribbeanposted prices. El Salvador has not yet benefitedfromthe
availabilityof crude oil suppliesat pricesdiscountedfromthoseposted
by the companieswhich own the local refinery.The government has
664 INTERNATIONAL AFFAIRS

remained indifferent to the situation-somuchin fact,thatit omitted

untiltheverylastmoment, and untilprompted by thecompaniescon-
cerned,to substitute excisedutieson theproducts of thelocal refinery
fortheimportdutiesformerly leviedon theimports of products from
overseasrefineries. Theseexciseduties-neededto protect thegovern-
ment'srevenue-areeven now only collectedon the basis of a
temporary law whichhas to be renewedevery60 days. The govern-
ment,moreover, faileduntilMayof thisyearto grantthelocal refinery
any protection againstimported products.In El Salvador,therefore,
one foundtheunusualsituation of Shelland Esso seekingto persuade
thegovernment to takean increasedinterest in theactivities of theoil
industry!
In CentralAmericaone gainstheimpression thatthegovernments
have had neitherthe strength nor the necessary expertknowledge to
constrain theactivities of theprivateforeign oil companies.However,
conditions areperhapschanging, as is shownin thecase of CostaRica.
In 1942thegovernment abandoneditsmonopoly overgasolinemarket-
ing. Sincethentheindustry-represented by fivecompaniesin total-
has enjoyedthe rightto importand distribute petroleum products
withoutgovernment interference except'over maximumprices for
gasoline:hardlya significant controlin thatthegovernment accepted
a build-upof thesepricesfromthebasis of highU.S. pricesforcrude
oil in the Gulfof Mexico. From this peacefulsituation, however,
therehas developed overthepasttwoyearsan increasingly acrimonious
argument betweengovernment and industry arisingfromproposalsto
builda refinery in thecountry to matchsimilardevelopments in the
otherCentralAmericanrepublics.Until 1962 it seemedthatthere
wouldbe agreement;to theconstruction of a refinery in thecountry by
Texaco-one of thethreemainmarketing companies.This U.S. com-
panywas granted therightto buildtherefinery: a decisionwhichthe
othertwomainmarketing companies-EssoandShell-wereprepared to
acceptfortheyhad refineries underconstruction elsewhere in Central
Americaand werethusin a positionto negotiate, at an international
level, satisfactory productexchangearrangements such that their
interestslocally would be fully'safeguarded. However,Texaco's right
to buildandoperatetheCostaRicanrefinery was rescinded in 1962by
thenewlyelectedgovernment of FranciscoOrlich,and the concession
was later given-withoutany opportunity for the othermarketing
companies to submitoffers-toAlliedChemicalswhoseoil subsidiary,
theUnionOil CompanyofTexas,had no otherinterests in CostaRica.
Thisactionseemsto havebeena deliberate moveagainstthelocal
companiesof theinternationally integrated companies, particularly as
AlliedChemical's refineryhas,ineffect, beengranted complete monopoly
 OIL AND STATE IN LATIN AMERICA 665

rightsto the supplyof productsthroughoutthe countryby means of

high dutyprotectionagainst imports. This is a bad enough blow in
itselfto the marketingcompanies (used, of course, to takingproducts
made fromcrude oil producedby theirparentcompanieselsewherein
the world) but in addition theyalso visualise the eliminationof their
local marketingprofitsfor, on the one hand, the governmenthas
insistedthatthereshall be no increasesin the pricesof productsto the
consumers,while on the otherhand the marketingcompanieshave not
been guaranteedthe ex-refinery prices of the productswhichtheywill
have to purchasefromthe Costa Rican refinery.They seem to 'feel
that these arrangements will underminetheirprofitability, particularly
as they have to meet higherinternaltransportcosts in moving the
productsfromthe refinery on the Caribbean coast to the main centre
of consumptionin the San Jose area. The governmenthas declined
to offerany help to the foreigncompaniesand has said thatit is their
responsibilityto sit down withthe refining companyto workout ques-
tions of prices and supply arrangements.
The increasinglyhostile atmospherebetweenthe state and the oil
companiesin Costa Rica has been further exacerbatedby the claim of
the government thatthe companies'recentrenewalsof their1942 rights
to imprort gasoline are not valid as they lack the approval of the
LegislativeAssembly-approvalwhichthecompaniesargueis notneces-
saryunderthe existingCosta Rican law. As a resultof thesedevelop-
ments there now seems to be a situationof mistrustand suspicion
between the establishedforeignoil companies and the government,
and thereis some feelingin the formerthat theireliminationis but a
matterof time-by expropriation or by othermeans-with a monopoly
of marketingultimatelygoing eitherto the government directlyor to
the refiningcompany in which the state will eventuallyacquire an
interest. At the momentthe companies can do nothingbut wait-
hoping,perhaps,fora changeof government in 1966 to bringa renewed
possibilityof co-operation. In the meantimeall investment by the oil
companies in the countryhas been ended and state-oil company
relationshipsin Costa Rica seem likely to deteriorateratherthan to
improveif constructionof the RefineriaCostarricenseis continued
under the presentconcession arrangements.
* * *

In all the countriesconsidered so far the oil industry,though

importantbecause it provides the major source of energy,is not a
dominatingfeatureof the politico-economicenvironment.But what
of the situationbetween state and foreigncompanies in the two
countriesof Latin America-Colombia and Venezuela-where oil is of
in theeconomicand politicalframework?
thegreatestrelativesignificance
666 INTERNATIONAL AFFAIRS

In Colombia-in spiteof an estimated10 per cent.contribution

by the oil companiesto totalgovernment revenues,and in spiteof
oil's positionas the secondmostimportant foreignexchangeearner
(about 15 per cent.of thetotal)-theoverriding impression is one of
an absenceof governmental and publicinterest in theindustry except
in so faras it is the mainsupplierof domesticenergyrequirements.
Thus it lies withina sectorof the economywhichwill slowlybut
inevitablybe brought understatecontroland ownership.This willbe
achievedby acts such as the gradualextensionof the activitiesof
Ecopetrol-thestate oil company-andby rigid controlover the
pricesof all petroleumproducts. The privateforeigncompanies
operating in thissectorare thusbeingsqueezedbothin theextentof
theiroperations and in theirdegreeof profitability.
The Colombianoil industry in itsinternational context,on theother
hand,seemsin generalto suffer froma lack ofanypositivegovernment
policyor even encouragement. Thoughthe legal framework forthe
operationand development of oil concessionsin Colombiais very
complexthereseemsto be at least generalagreement thatthe 1961
Oil Law is less favourablethan its 1934 predecessor for attracting
exploration and development efforts.This arises particularly from
changesin thebasis by whichdepletionallowancesare computed, so
thatno one seemsto be verycertainas to whattheoveralleffect on
willbe. In addition,
profitability a newinterpretation by theMinistry
of Financeof the regulation's concerning the oil exchangerateseems
likelyto put an additionalsqueeze on the companiesinterested in
exporting oil.
Partlyas a resultof theseconsiderations twoof theold-established
companiesin Colombia-Mobiland Shell-have ceased theirexplora-
tionand development workand are engagedonlyin depletingtheir
existing fields. This attitude appearsnot to have arousedunduecon-
cern in government circles; neitherhas the state taken much
actionin processing
effective newapplications forconcessions-ofsome
350 applications, attracted principally by a good generalinvestment
climate,onlya handfulhave so farbeen considered.Thus govern-
mentalindifference to thepossibilities of theoil industry increasingits
contribution to the nationalproductand, moreespecially, to export
earningsseemslikelyto ensurethatthe countrywill miss a golden
opportunityto developitsresources at a timewhenmanyoil companies
are anxiousto diversify 'theiroperations intothe Westernhemisphere
as a hedgeagainsttoo heavya dependence on otherpartsof theworld.
The successof theTexaco-Gulf development in theextremesouthof
thecountry an
(in area,incidentally, conceded underthe 1934oil law
witha low royaltyobligation) may temporarily hide the need fora
 OIL AND STATE IN LATIN AMERICA 667

fundamentalchange in the attitudeof the Colombian Governmentto

theinternational oil industryif the possibilitiesof the countrybecoming
a much more importantoil producerand exporterare to be realised.
Paradoxicallyperhaps,relationshipsbetweenoil industryand state
seem to be at theirbest in Venezuela-a far cry from the anti-oil
companyattitudesthat one mighthave expected froma government
controlledby the Accion Democratica,a party formerlypledged to
eliminateforeigncontrolof the country'soil. An examinationof the
reasons for this developmentwould go well beyond the scope of this
article,but theyseem to arise in large part fromthe professionalism of
the Venezuelan Governmentin oil mattersand froma cards-on-the-
table attitudeby both government and companies-at least in privateif
not in public-in the period since 1961.
Essentially,it seems possible to argue that by the time Accion
Democraticacame to formthe governmentin 1959, the opportunities
for any revolutionary change in the structureof the oil industrywere
almost non-existentas a result of the decline in the comparative
advantageof Venezuelanoil in mostworldmarketsin face of increased
competitionfromthe Middle East and fromnew sources of supply.
On the otherhand, the companiesdid not particularly wish to risk the
loss of their investmentsby action which would alienate *thenew
government, despite their suspicions of its intentionsin the light of
previousexperiencewith Accion Democraticain the late 1940s when,
accordingto Edwin Lieuwen,it pursued'aggressive tacticsto increase
the nation's share in the profitsof the oil industry'and enforceda
policy which led to a 'menacing rise in productioncosts'.3 The
companies were also influencedin their decisions to take no really
decisive steps against Venezuelan oil by the U.S. State Department's
evaluationof Venezuela as the key to stabilityin the Caribbean area
and possibly throughoutLatin America. Thus, both the Venezuelan
Government and the oil companieshave had a real interestin maintain-
ing the statusquo-though both,in fact,have taken various measures
to protectwhat theyconsiderto be theirlong terminterests.
Thus, the oil companieshave restricted theirofftaketo a rate much
below the growthin world demand and have greatlyreduced their
explorationand developmentefforts.The government, on the other
hand,has introduceda stringent conservationpolicy. It has attempted
to preventthe sales of Venezuelan oil overseas at prices discounted
morethan 10 per cent.fromthe posted price. And it has sought-,and
obtained-a special relationshipwith the United States in the latter's
oil importprogrammeso that Venezuela is now guaranteed prior
consultationbeforethatprogrammeis changed.
3 Venezuela. By Edwin Lieuwen, p. 96. (London, New York: O.U.P. for R.T.T.A
1961. Reviewedin InternationalAbfairs,
July1962,p. 442.)
668 INTERNATIONAL AFFAIRS

Neithertheactionsof thecompaniesnor thoseof the government

have,however, madea confrontation necessary and in thisperiodboth
sidesappearto havetakenpositivestepsto re-evaluate boththeirown
and theiropponent's positions.Out of thishas emerged understanding
in government/company relationshipsbased on an appreciationof
certainareas of immediate mutualinterest as faras Venezuelanoil is
concerned.However,thesteps taken both by thegovernment and by
the industry seemto represent tacticalmovesdesignedto securethe
short-term future.The presentsituation is perhapsone of equilibrium
-but onlyof unstableequilibrium-which maybe upsetat any time
eitherby designor by miscalculation.The underlying feelingin
Venezuelafor the eventualnecessityof a much greaterdegreeof
indigenousVenezuelancontrolover the oil industry in the country
mightbe satiatedby action shortof expropriation- a crude and
weaponrejectedas a pointlesssolutionby mostVenezuelan
ineffective
opinion-butanyactiontakencould face theinternational companies
with theirgreatestLatin Americanchallengesince the Mexican
nationalisationof 1938. The companies,in theirpresentform,in
Venezuelaare stillacceptedonlyas a necessary and temporary evil-
the current understanding by bothpartiesof thefactsof Venezuelan
oil's uncompetitiveness in a highlycompetitive worldoil situation
shouldnot be allowedto mask themorefundamental realityof the
incompatibilityof Venezuelannationalism withthe presentpolitico-
economic organisation ofherbasicindustry.
Thus, throughout Latin Americaone findsat best an attitudeof
indifferenceand at worstan attitudeof mistrust or even hostility-
eitheractualor latent-towards the internationaloil industry.And
these attitudes,it sihouldperhapsbe pointedout, owe nothingto
Communist influence of anytype-oneor twoof thestatecompanies
mayhaveflirted withtheidea of co-operation withtheSovietUnion's
oilindustryoverthelastfiveorsixyearsbutnothing hascome
significant
out of thisexceptin the veryspecialcase of Cuba, and even there
thereare indications of a revivalof contactswiththeEuropeanif not
withtheU.S. side of theinternational industry.It seemsnotbeyond
theboundsof possibility thatCuba willturnto Europeancompanies
forat leastpartof hercrudesupplyand possiblyfortheexpertise and
equipment requiredin building hernewrefinery.
The attitudein manyLatin Americancountries towardsthe oil
industry resembles, in fact,the attitudeof manyEuropeansocialist
partiestowardsthepublicsectorof the economy.In the same way
thattheBritishLabourParty-stressing theneedforthe'commanding
heights'of theeconomy to be under publicownership and control-
has broughtor intendsto bring,coal, gas, electricity, road and rail
 OIL AND STATE IN LATIN AMERICA 669

transportand steelintothepublicsector,so LatinAmerican countries

seetheneedfortheiroil industries
to be directly
understatecontrolas
one of thecommanding heights
of abouteveryeconomyin theconti-
nent. Thus,relationsbetweentheinternationaloil companiesand the
countriesof Latin Americapresentseriousand continuing problems
fortheimmediate future.
* * *

Whatof the issues whicharise fromthe interests of the United

Statesin Latin Americanoil? Because the privateoil industry in
LatinAmericais principally Amenican (the onlyimportant exception
beingtheinterests oftheShellGroup)itsproblems are,in somemeasure,
part of the generalcrisisof confidence which existsbetweenthe
UnitedStatesand the coun-tries of Latin America. But thereare
aspectsof UnitedStatesLatin Americaneconomicpolicywhichare
eitherpeculiarto the oil industry or of particular significanceto it.
The mostimportant is the attitudeof the U.S. Government towards
thestateoil companies. Untilrecently the UnitedStatesrefusedto
makegrantsor loansto nationalised oil companies-a policyspecific
to LatinAmericabecausesuchcompaniesrequiring financial helpdid
notexistelsewhere in theworld. The refusalof suchaid was on the
grounds thatsufficientprivatecapitalwas availableforthedevelopment
of theoil industry and thatit was notin the interests of theUnited
Statesto encourage' socialistic'practices.But thispolicywas speci-
ficallytied to oil, for the UnitedStatesdid give aid to otherstate
enterprises-including projectsas basic as iron and steelplantsfor
which, itcouldalso be argued,private foreigncapitalwas also available.
This UnitedStatesattitudehas tbeena sourceof suspicionin Latin
Americabecauseit seemedto indicatethattheU.S. Government stood
officiallybehindits privateoil companiesinterested in exploiting
Latin Americanoil but whosecapital was not acceptableto many
countries withan intensely nationalistic
outlooktowards theoil industry.
The basis of this policy,whichwas rigidlyupheld underthe
EisenhowerAdministration, was, however,increasingly questioned.
Thus,in 1960,SenatorAikenreported aftera fact-findingmissionto
severalLatin Americancountries:
Thereare manyways in whichthe U.S. could aid Braziliandevelop-
ment .. . For example,if Petrobrashad additionalcapitalto expand
its productionmore rapidly,materialforeignexchangesavingscould
be madethrough a reduction oil imports.The refusalto deal
in foreign
withPetrobrassimplybecause it is a government monopolyseems
altogethertoo doctrinaire.4
4 Report of Senator G. D. Aiken on a Study Mission to Latin America to the U.S.
Senate Committeeon Foreign Relations, p. 8. (Washington: U.S. Government
PrintingOffice,February2, 1960.)
670 INTERNATIONAL AFFAIRS

A fewmonthslater,SenatorMorse also wroteof Brazil:

One particularpolicywhichI feel is mistakenis the adamantrefusal
of the government even to considerpublicloans to Petrobras. The
positionis taken on the narrowdogmaticgroundsthat petroleum
development shouldbe carriedoutbyprivatecapitaland thatitcouldbe
and would be if Brazilwould changeits own policyof purelypublic
development. However,thispositionignoresthefactsthatit is Brazil's
oil and Brazil'spolicywhichare involvedand ,theAmericanattitude
lendsgreatcredenceto the Brazilianchargesof economicimperialism
and intervention.5
In addition to this specificchallenge to the then existingpolicy in
Brazil, Senator Morse also wroteof the generalimpact of this policy
in Latin America.
We need a less doctrinaire approachto the questionof publicversus
private enterprisein extendingeconomic assistance. The present
distinctionsmacks'of economicintervention in a country'sinternal
affairs thefreedom
and violaltes of a country
to developitsownresources
in its own way. This is particularlytruein respectof loans for oil
development.Whotherwe like iltor not, the factis thatthe view is
strongly held in manyplaces in Latin Americathatthe Americanoil
cornpaniesso influenceour foreigneconomicpolicythattheyare able to
block any requestfora foreignaid loan to a government oil project
abroad.6
The earlier rigidityof the U.S. policy has been relaxed to some
degree since 1961 under the Democratic Administration. Export-
Import Bank loans have been made to finance sales of American
petroleumequipmentto Y.P.F. and Y.P.F.B-the state oil mono-
polies in Argentinaand Bolivia respectively.But too much significance
shouldnotperhapsbe readintothis. The changein policymightwell
have beenmade primarilyto enableU.S. equipmentmanufacturersto
competewiththeirEuropeanrivalsforsales in LatinAmericarather
thanbecauseof anyreallyfundamental changein the attitude
of the
UnitedStatestowardsstateoil enterprise.The financialassistance
was only for equipment-not for generalexplorationand development
costs such as state oil companies need if they are to move forward.
The real test may well come in Argentinawhere the employmentof
privatecontractorsto produceoil forY.P.F. has recently
beenrejected
by the government and all the contracts
terminated.If Y.P.F. is to
be successfulin increasingoutputwithoutthehelpof foreign private
companies,it willsoonhaveto look forloansand technical assistance
fromfriendly foreigngoyernments. That occasioncould well be the
momentof truthfor Americanpolicy on this issue,.

5 Reportof SenatorW. Morse on a StudyMission to South Americato the U.S. Senate

Committeeon Foreign Relations, p. 28 (Washington: U.S. GovernmentPrinting
Office,February20, 1960.)
6 Ibid. p. 7.
 OIL AND STATE IN LATIN AMERICA 671

A secondaspectof U.S. economicpolicytowardsLatin American

oil arises froma problemalreadymentionedin connectionwith
Venezuela'sindustry.This is the questionof the attitudeof the
UnitedStatestowardsimportsof strategic material-ofwhichoil is
consideredto be one-from the WesternHemisphere.Although
Venezuelahas been guaranteed priorconsultation beforechangesare
made in tiheU.S. oil importprogramme, she did not get whatshe
reallywanted: eitherparityof treatment withCanada and Mexico
whoseexportsof oil to the UnitedStatesare not subjectedto the
officialquotas or, alternatively, a country-of-originquota whereby
Venezuelais guaranteed a steadilyrisingmarketfor her oil in the
UnitedStates irrespective of competition fromotherparts of the
world. The guarantee is smallconsolation
of consultation becauseit
does nothing to ensurethatVenezuelawillhave theoutletswhichshe
needsto maintain a 4 to 5 percent.perannumincreasein production-
the minimumrate of increasewhichis needed to underwrite the
country's ambitiousdevelopment programme.Continuedstability in
Venezuelamaywelldependon suchan increasein production being
achieved,and theUnitedStatesmaybe obligedto re-assessherpolicy
in the interests of hemispher-icsolidarityagainstfurther Communist
advance,and in spite of the oppositionthat such a move would
arouseamongthe international oil companies. These companiesdo
notlike beingtiedby quota to any one particular sourcebecauseof
the impactthis has on the flexibility of theirinternationaltrading
patterns.
* * *

In conclusionI wantto examinebriefly thethirdsetof issuescon-

cerningoil and statein Latin America-theplace and role of the
industryin the movementtowardsregionaleconomicintegration.7
Here,perhaps,we move on fromthe controversial problemsof the
presentto what will probablybe equallycontroversial problemsof
thefuture.
Although Argentinahaslatelyproposedthesettingup ofa 'common
oil market'amongthose Latin Americancountrieswith state oil
at themomentoil is playingno partin the stepstowards
industries,
integration.In fact,the statutesof the Latin AmericanFree Trade
Association excludedoil fromtheregionalarrangements
specifically to
be negotiated,while a protocolto the CentralAmericanCommon
MarketTreatylaid downthatdecisionson tradein petroleum products
7 See David Huelin,' Economic Integrationin Latin America-Progressand Problems'
in InternationalAfjairs, July 1964, pp. 430-439, for a recent appraisal of the
integrationprogramme.
672 INTERNATIONAL AFFAIRS

wouldhaveto awaitspecialnegotiations to be initiatedso thatagree-

mentcould be reachedwithinfiveyearsof the Treatyentering into
force. The negotiations have notyetbeeninitiated.
Oil, or rathertheinfluence of oil, has,in fact,createda stumbling
block to the achievement of economicintegration.This has arisen
fromVenezuela'sfailureto join L.A.F.T.A.,largelyas a resultof the
impactof theoil industry upon its economy.Generalwagelevelsin
Venezuelahave risentowardsthosein the oil industry, so making
its otherindustries uncompetitive withproducersof similargoods
elsewhere in thecontinent to theextentthattariff protection couldnot
be removed. Venezuela'sabsence fromthe regionalarrangements
removedthe incentiveto studythe possibilitiesof regionalself-
sufficiency in oil in spiteof thefollowing considerations: thatregional
self-sufficiencyis the most important aspectof the integration pro-
gramme; thatoil is oneof thefewcommo;dities thatis requiredin large
quantities throughout thearea; thatoil is tradedthroughout theconti-
nentwithprospects ofa continuing and rapidlyexpanding market;that
oil is availablein sufficient quantities withinthe area to covertotal
needsforthe foreseeable future;and that,in spiteof regionalavail-
ability,oil fromotherproducing areas of the worldhas movedinto
LatinAmericain increasing quantities in recentyears.
Indeed,oil is so vital and so basic to all the countries of Latin
Americathatit is unrealistic to imaginethattheoil industry can remain
outsidethe developingregionalarrangements or that the regional
integration can be successful withouttheinclusionof oil. The recent
indicationby Venezuela'snew President(President Raul Leoni) that
hiscountry plansto join theFreeTradeArea and thatnegotiations to
thisend will shortly be initiatedsuggeststhatthe questionof oil in
LatinAmerican regional arrangements willreceivemuchmoreattention
in thefuturethanit has in the past.
Butthetrading and organisationofLatinAmerican oil on a regional
basis is unlikely -tobe achieved without some formal regionalbody
whichcouldultimately develop into a Latin American Oil Community,
perhapson the lines of the European Coal and Steel Community,
whereby particular was givenat an earlystagein theintegra-
attention
tionprogramme to basic sectorsof theeconomiesof theparticipating
nations.
Mexicomaywellrevivetheinitiative it tooka fewyearsago when
itsstateoil company, Pemex,helda seriesofmeetings withthenational
oil companies of several otherLatin American countries. Out of these
meetings camepaper decisions for joint investment in petro-chemicals
by Argentina and Mexico. Brazil and Mexicoplannedto exchange
information and technicalassistancein variousaspectsof the oil
 OIL AND STATE IN LATIN AMERICA 673

industry.Bolivia and Mexico planned joint productionof lightcrude

in Bolivia to be used in conjunctionwithMexican heavycrude oil in a
refinery on the west coast of Mexico. None of these agreementshas
producedany results,but theydo seem at least to providean indication
of possiblefuturetrends-trendsset out by theDirectorof Pemex in the
followingterms:
Eventuallyby futureinvestments and by joint operationsthe six
LatinAmericancountries(Mexico,Peru,Venezuela,Brazil,Boliviaand
Chile)willforma blockttodefendt-heCommonMarket.It willbe an
internationalconsortiumto protectfree Latin Americafromforeign
oil monopolies.8
The growthof regionalarrangements for oil in Latin America will,
of course, change the local environmentfor the internationaloil
industry;the problemsthatthe privateoil interestscurrently
face within
the individual countriesof Latin America would be supersededby
problemsof a regionalcharacter. Such problemswould arise fromthe
developmentof some formof supra-nationalcontroland direction,not
only over trade in petroleumproductsbut also over the patternsof
productionand refiningin the regionand over the flow of investment
into the industry. Whetherthe internationaloil industrycould con-
tinue to work withinsuch an environmentseems likely to be the
major economicand politicalquestionthatit will have to face in Latin
America in the next decade.

Dr. Odell, a lecturerin Geographyat the London School of

Economics,is engagedin researchon theinternational
oil industry,
particularly
in LatinAmerica. Authorof An EconomicGeography
of Oil, and otherpublications.

8 From a speechby the Directorof Pemex at the ceremonymarkingthe signingof the

agreementbetweenPemex and Y.P.F. in Argentinain 1960.