Domestic demand will increase, unlike in more advanced regions

In the coming decades, oil consumption in Latin America will continue to grow, in the face of a trend towards leave which is already on the horizon of many advanced countries. Population growth and the increase in class average explains this increase in demand. This domestic demand will serve to strengthen the extractive industries of Latin American crude oil producers, but it will make the region's refining deficit chronic.

Latin America's oil consumption horizon

article / Ignacio Urbasos

The oil industry is experiencing a change in export and consumption patterns in the Latin American region. The sector's classic orientation towards the United States has changed in a new context in which exports are much more diversified with a tilt towards emerging Asian countries. Similarly, domestic demand is steadily increasing due to population and economic growth. However, the region's refining capacity will remain inadequate. This paper will offer a long-term analysis to try to offer a better understanding of the region's energy future, mainly in its consumption, extraction and subsequent refinement.

First of all, Latin America's demographic and economic expectations must be taken into account: population growth will increase by 800 million people by 2050, and economic growth could be 2% per year for at least the next decade. The direct effect of this will be the increase in electricity demand by 91% by 2040 and the increase in issue of vehicles in the region from 94 million in 2016 to the 165 million expected by 2040.

As can be seen in the graph below, the greater demand for oil in the region will be associated with transport, which will tend to be more efficient in consumption, but the promised arrival of the electric car is still far away, with expectations of less than 4% by 2030 worldwide. Similarly, the increase in the class average 126 million people by 2030 will have a direct impact on the increase in air travel, which is projected to grow by average 3.4% per annum until 2034, agreement to the last report of ICAO, with a consequent increase in kerosene consumption.


Expectations for daily oil consumption in million barrels per day (Mb/d) in Latin America and the Caribbean between 2016 and 2014


It should be borne in mind that in Latin America there are subsidies for both gasoline and diesel, which generates more affordable prices and distorts demand clearly upwards. These subsidies respond mainly to the logic that citizens should be beneficiaries of their country's possession of natural resources, and are concentrated in traditionally oil-producing countries such as Ecuador, Venezuela, Mexico or Argentina. However, these countries import fuel to a large extent due to their limited refinery capacity, generating a double trade and fiscal deficit, as ECLAC points out. The future of these subsidies is unknown, but any change would have a high political cost, since by affecting the price of a basic good it would have consequences on broad social sectors with great electoral impact.

For its part, oil's contribution to electricity generation will remain constant at 500,000 barrels per day, decreasing its importance from the current 46%, according to figures for Latin America from the International Renewable Energy Agency. The region will benefit enormously from the increased presence of renewable energies, a sector that it already leads due to incomparable geographical conditions, highlighting the enormous importance of hydropower.

Over the next few decades, two major phenomena will occur in Latin America: the universalization of access to energy and a new model energy with less presence of oil and biofuel (wood and waste) in favour of gas and alternative energies. One of the great challenges facing the region is to develop a more integrated electricity system nationally and internationally that increases consumption efficiency and allows greater flexibility in production sources. The geographical uniqueness of the region requires enormous investments to carry out this task; however, there are already several regional projects in this direction: the Andean Electrical Interconnection System, which includes the countries of the Andean Community plus Chile, and the Central American Electrical Interconnection System (SIEPAC).

Refining deficit

This increase in consumption is not accompanied by greater refinery capacity, which is already enormously deficient, and generates a critical dependence on imports of gasoline and other derivatives from the US. A trend that is likely to be a constant in the short and medium term for the region and is added to the 14% decline in refinery activity in the region since 2012 (World Oil Outlook 2017), which already adds up to a loss of one million refined barrels per day since that year. High installation and maintenance costs, around 2% of the annual installation cost, add to the region's chronic political uncertainty that largely scares away private investment.

An illustrative case is that of the Pacific refinery in Ecuador, which was presented as the largest project refinery in the country at the beginning of Rafael Correa's presidency in 2007. The project began with a financial stake of 49% by PDVSA and 51% by Petroecuador, in addition to the award of the project to the construction company Odebrecht. As of today, PDVSA has withdrawn its contribution and the Brazilian construction company is facing trials in the country for corruption. result a lost decade and forcing Lenin Moreno to reformulate the project, including the name: now Manabi Refinery.


Relationship between oil extraction, refining and demand in Latin America and the Caribbean (Mb/d)


As we can see in the graph, the large oil producers in Latin America have a deficient refinery capacity. It should be borne in mind that there is not only an undercapacity in the region, but also an under-activity, which creates an even greater gap. The activity of these plants is currently around 70% of their total capacity. Those countries that do not have oil production, but do have a relevant refining industry, are Curaçao, which has one of the largest PDVSA centers, Chile and Peru.

In final, the Latin American oil sector faces the coming decades with enormous doubts about its refining capacity and far from achieving self-sufficiency. The lack of capacity to attract foreign investment from historically oil-producing countries has generated a disappointing scenario that aggravates the already limited industry in the region. The social transformations inherent in a society that is growing demographically and economically require investment in infrastructure in order to meet the expectations of universal access to education. network and the incipient consumption of the incipient class average.

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