Olade’s discussion gathered contributions from authorities, think tanks and private stakeholders in the energy sector
The impact of the current volatility in hydrocarbon prices and possible mitigation measures at regional level were the main topics of a dialogue held by the Latin American Energy Organization (Olade).
Said volatility – the product of war in Europe – has an impact on the whole world. In Latin America and the Caribbean, it leads hydrocarbon-producing countries to increase their revenues, but also causes importing countries to suffer tensions in their budgets and public accounts, because they must face higher expenditures.
The event, organized by Olade, provided an enriching exchange of views from regional authorities and representatives of relevant think tanks, together with analysts and players from the private sector. Topics such as energy efficiency, price stabilization mechanisms and renewability were brought to the table.
Below, we share the most outstanding contributions that were given during this conversation:
Olade’s Executive Secretary, Alfonso Blanco Bonilla
Incidence of volatility
“We left the Glasgow climate summit with climate emergency as a priority, and today the priority is shifting to global energy security. This clearly has an impact on the development of energy transitions and the decarbonization of the global economy in order to comply with environmental agreements.”
“We are observing an increase in the price of commodities at the international level, which affects the tradable goods that Latin America and the Caribbean has the capacity to place in international markets, impacting regional economies.
This is where the incidence of oil prices is generated, throughout the supply chain, in the evolution of the tradable goods that our region produces and exports. This has a strong impact on the competitiveness of our region.”
Regional capacity
“What is the capacity of Latin America and the Caribbean to compensate for the oil that does not flow into the West because of the blockades on Russian oil and gas? This strongly affects the reordering of supply at the global level.
Our region has the capacity to offset part of this supply; there are certain opportunities for the extractive sector in the short and medium term to respond and reactivate an industry and certain projects that, in a context of low prices, did not fit into the international pipeline. We are talking about the capacity of the unconventional sources and the need for additional exploration.”
Subsidies, efficiency and renewables
One of the elements that can be worked on is the targeting of subsidies, so that -if they are applied- they do not have a regressive impact. The approach should be highly focused and targeted at sectors in need of such support.
Energy efficiency is an immediate policy tool that has the capacity to influence local markets.
Renewables have proven to be highly competitive. The big question is whether with renewables we have the capacity to act in all energy segments and end uses. For example, 40% of the use corresponds to transportation, and we are not responding immediately to this type of use, which is strongly dependent on fossil fuels.
This is not to say that we don’t have the conversion path, but it involves time and capital. This must be taken into consideration.
Jorge León, Energy Economist, British Petroleum
“Right now, many countries in Europe are reintroducing fossil fuel subsidies, as a way to limit the pain that the current crisis is causing to consumers. We have just come out of a pandemic that has caused a lot of economic and social wear and tear and the last thing the world needs now is an energy crisis.
The response of governments in at least Europe and Asia has been to limit the rise in fossil fuel prices. It is understandable that countries should do this because the social aspect is extremely important.
The problem with subsidies is that once you include them they are very difficult to remove. At the same time, the same countries that said in Glasgow that they were going to eliminate fossil fuel subsidies are now introducing them. This highlights a fundamental element. No one said the energy transition was going to be easy. What is essential is that the policy makers focus on a just energy transition. This is especially relevant for our region. It is also necessary to take into account social requirements.”
Ali Al Saffar – IEA
“In the short term, everyone is going to be trying to get oil and gas, but in the medium term there is really going to be a focus on energy transition rather than energy security.
Energy transition and sustainability will be treated as a single issue, mainly in Europe. This will be the prevailing vision in the future.
Countries are going to start looking for different strategies to increase the introduction of renewables, because they are going to be seen as a way to secure energy supply.
Due to volatility, countries are unable to make the investments they require. In Latin America, Asia and the Middle East, there are tensions on the fiscal side: the investment environment is becoming more difficult.”
Jeremy Martin, VP Energy and Sustainability at Institute of the Americas
“Our policy makers can send a message to the public about acting now to reduce energy and fuel consumption.
We have this problem: consumption, consumption, consumption (…) At the end of last year, there was talk of a political commitment to remove or go through a process of reducing subsidies. And today, even here in California, we are seeing policy measures aimed at increasing consumer subsidies.
Regional capacity
Can the region compensate for resources that do not come in from the conflict in Ukraine? Unfortunately, in the short term there is no answer that can fill this gap. It is impossible for the energy sector to respond overnight. That’s the bad news.
The good news is that in the medium and long term this region has enormous opportunities to offset global needs to sustain economic growth and development of countries in the region and in the global energy chain.
Integration
In the medium term, a step can be made by taking advantage of regional integration and the assets that have been built up over the last 30 years. I am pleased with the agreements between Argentina and Bolivia, Argentina and Chile in the sense that we can cover the consumption gap ourselves.
Venezuela
Many opportunities open up in the medium and long term. Venezuela is another opportunity. There is no greater resource in the region. It may be an option if we can figure out how to get back to their historical supply.
Leonardo Beltrán, Distinguished Visiting Fellow of Columbia’s Center on Global Energy Policy
Available resources
Volatility is associated with the availability of the resource. We have extraordinary natural capital in the region. For example: solar, wind and geothermal resources.
It is exactly the same to certify geothermal and hydrocarbon potentials. And the difference is cleanliness and competitiveness. We should start thinking if this is not the time to further develop the geothermal resource in Latin America and the Caribbean.
Subsidies
While it is true that the pain faced is immediate, there are ways to channel the incentives.
It would be necessary to think of a differentiated fiscal policy, thinking of the people who have the least and not a generalized subsidy that is highly regressive and stimulates higher consumption.
Energy Integration
If we promote integration, infrastructure development in each country becomes less necessary and we can promote a more interesting market in terms of size, energy portfolio diversity and much more resilient in terms of energy security.
It would be a policy, in the short term, to invest in strengthening those links and interconnections in the region.
Carlos Garibali, ARPEL’s Executive Secretary
Missing the train
A high-priced environment is challenging for some and perhaps an opportunity for others. I emphasize the maybe. Will we be able to seize this opportunity? Or is it another train we’re gonna miss?
As a region we are an example of a lack of alignment of energy policies, we have cases of energy integration failures that are caused by historical backpacks or ideological cracks. Nor is integration a panacea.
Renewables
Volatility does no one any good, because it implies uncertainty and this affects investments and the completion of transactions.
While high hydrocarbon prices favor the economics of renewable energies, importing countries would do well to free themselves as much as possible from the price volatility of fossil fuels. Turning to renewable energies, if they become economic and commercial.
Investments and opportunity
The short term should not be confused with the long term. It is necessary to distinguish between the current situation and the trend, between noise and signal.
Planning and large investments are based on trend; projects are long-term. However, we are in a very serious situation. If the geopolitical conflict extends over time and has long-term consequences for energy flows, the conjunctural becomes structural.
If this lasts over time, there is an opportunity for the region to meet the demand that Russia will not meet, in case the sanctions persist over time. Now, that takes time.
Gas resources
Now, the urgent has more emphasis than the important. However, the transition is a substantive issue and an inexorable trend.
I don’t think they’re mutually exclusive. There is an intersection, for example, in the development of the region’s gas resources. I put on the table: why is gas not financed. It is the optimal transition fuel.
Panama
National Secretary of Energy, Jorge Rivera
In the case of Panama, the energy transition agenda was approved in November 2020, with the focus on decarbonization, digitalization, decentralization and democratization. This has always been subject to two issues. First, that it is a gradual process. It’s not an act, not a moment. It is a process that must be developed and that has many complexities. Secondly, that this process is embedded in the energy policy guidelines.
Energy policies maintain certain classical and permanent objectives
The first is security of supply. The second is affordability, in terms of prices and costs. Reliability, in terms of continuity of supply, but also sustainability.
The energy transition must incorporate each initiative in terms of how much security or how much it impacts affordability.
Fiscal policy
There is also the role of fiscal policy integration. Today we see it with the impact of rising costs and volatility. Uncertainty reduces the ability to project and make decisions in the medium and long term.
This global supply-demand gap is affecting fuels in Latin America, but could be affecting other commodities in the near future.
We are importers of refined products. In Panama we reinforce a process of efficiency and energy savings, but we do not have the capacity to influence the prices of the fuels we import. Nor do we have a fiscal space that allows us to enter a program of subsidies in addition to those we already have since the pandemic.
The word associated with global volatility is uncertainty. But the important thing is to have a sense of purpose that allows us to build a long-term roadmap that serves as a tool to manage these impacts. We have to prepare for high uncertainty environments and together.
Bolivia
Minister Franklin Molina
The effect of the first four waves of Covid, which affected the energy contraction in the countries, could be felt in our economies and Bolivia has not been the exception. We have had a contraction in the electricity sector that reached 24% and logically the paralysis in all economies, to a greater or lesser extent, of transportation undoubtedly had a very important effect on energy demand.
Now, the context of war in Europe in particular presents us with other challenges in terms of energy security.
It is important to make progress in strengthening energy integration, when there is availability of supply and infrastructure in the region. The sometimes ideological and political conditions have been delaying integration. We must move forward in an effective process.
I stress the importance of gas in the development of our economies. In addition to being an energy source, it presents opportunities for the industrialization and supply of fertilizers.
There are opportunities and conditions in Latin America to take advantage of the infrastructure and availability of energy resources. There is a range to work as a region on a short, medium and long term energy agenda. It is important to take advantage of this situation to also seek investment and planning mechanisms that will allow our countries to emerge from a pandemic process. It is an optimal time to seek an agenda that can mobilize integration and investment in strategic sectors.
What this whole context is teaching us is that price volatility is going to continue to hold during this year.
Colombia
Hydrocarbons Director of the Ministry of Energy and Mines, José Manuel Moreno
Volatility has been posing a challenge in terms of fiscal, public and economic policy, and its impact on our post-pandemic economies. In the Colombian case, the national government has prioritized the recovery of economic activity through the stabilization of fuel prices during the last 18 to 24 months. In Colombia we have regulated prices in the liquid component. We have a state-owned company, Ecopetrol, which provides import and refining services.
During the pandemic, the government substantially lowered fuel prices to mitigate the effects of contracted demand. Gradually they were increasing and over the last few months we have had stable prices. Today, our price stabilization fund has been accumulating significant balances in favor of refiners and importers due to the volatility of international prices.
Although the government’s position has been to encourage price stability, this necessarily leads to an increase in the fiscal cost of the strategy.
We have also seen in macro terms a substantial increase in inflation, due to other types of components such as the effects of the war conflict. The challenges remain to stabilize, assume greater fiscal costs, adapt monetary decisions to mitigate the inflationary effect and its relationship with energy.
I believe that these challenges are common to all countries. (…) Beyond the formulas and strategies of each country, the main issues continue to be inflation control, fiscal sustainability, public policy messages in terms of stable prices for sectors such as transportation, heavy cargo, aviation and even food, where the transportation component is high in the price structure.
One of the big questions is the link between this situation and the process of energy transition. The effects are many, macro and have very interesting interrelationships. It is mentioned that financing may be impacted by an increase in interest rates to contain inflation.