Americas to Become Mecca of World's Energy

By Andres Oppenheimer

The turmoil for reform sweeping most Middle Eastern oil producers is grabbing big headlines today, but that region may lose some of its economic clout in the future: there are signs that the Americas will replace the Middle East as the world's biggest oil-producing region.

An article in the current issue of Foreign Policy magazine sums it up in a two-word headline: "Adios OPEC." It says the Middle Eastern countries-dominated Organization of Petroleum Exporting Countries will lose much of its power in the 2020s, because "the Americas, not the Middle East, will be the world capital of energy" by then.

Amy Myers Jaffe, head of the Baker Institute Energy Forum at Rice University and author of the article, says the shift will take place because of technological and political factors.

While geologists have long known that there are huge untapped deposits of energy in the Americas, most of these reservoirs were hidden in deep waters, shale rock or oil sands, that made them economically unfeasible to tap. But new technologies are changing that.

There are more than 2 trillion barrels of oil from unconventional sources in the United States, plus another 2.4 million in Canada and 2 trillion in South America, compared with the Middle Eastern and North African conventional oil reserves of 1.2 trillion, the article says.

Thanks to new techniques for horizontal drilling for shale gas production in the United States, and other new technologies to extract oil from Canada's oil sands, or from Brazil's off-shore "pre-salt" deposits, these and other reserves in the Americas will soon become the center of gravity of the world's oil supply, it says.

In addition, the Middle East's oil production will be affected by the political turmoil in that part of the world.

"The revolution-swept Middle East and North Africa will soon be facing up to an inconvenient truth," Myers Jaffe says. "Changes of government in the region have historically led to long and steep declines in oil production."

Libya's oil production dropped from 3.5 million barrels a day when Col. Moammar Gadhafi toppled King Idris in 1969 to 2 million barrels over the next three decades. A similar thing happened in Iran after the 1979 revolution that toppled the Shah, and in several other countries in the region.

After reading the article, I called Mauricio Tolmasquim, president of the Brazilian government's Energy Research Company, EPE, to ask about the latest estimates about Brazil's "pre-salt" offshore oil deposits.

Tolmasquim told me that Brazil is expecting to increase oil production from 2.3 million barrels a day now to 6 million barrels a day in 2020, adding that about half of the country's production will come from the newly-exploited offshore deposits.

"We will almost triple our oil production by 2020, and about half of our output will be exported," he said. "We expect to begin exporting a significant amount of oil around 2015."

Won't Brazil become a victim of the so-called "oil curse," I asked him. Most developing countries with huge oil deposits, such as Venezuela and Nigeria, have ended up with an avalanche of dollars that led to higher inflation, populist policies, growing corruption, autocrats, and more poverty -- a phenomenon that economists know as the "Dutch disease."

Tolmasquim noted that Brazil has passed a law creating an Oil Fund, much like Norway's, which will manage the country's oil income. The government will only be able to use the fund's interest for health, education, and other social services, he said. "The idea of this law was precisely to prevent a Dutch disease," he said.

My opinion: The coming oil boom in the Americas is great news. But I'm worried that many governments that will benefit from it, instead of following Norway's steps, will not resist the temptation of tapping it for electoral purposes.

During a visit to Brazil earlier this month, I learned that the law creating Brazil's Oil Fund allows the country's oil income to be invested both at home and abroad. That could allow the government to use the funds arbitrarilly. In Norway, all the fund's money is invested abroad, and its principal is off-limits to politicians.

If the Americas become the new epicenter of the world's energy production, it could be a blessing that would help many countries advance more rapidly toward the First World. But they should set up independently-managed funds to shield their oil income from government corruption starting now, to avoid the risk of sinking very fast back to the Third World.

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