The Southern Cone’s New Deficit - June 4, 2008
By Peter G. Hall, Vice-President and Chief Economist, Export Development CanadaListen to the Weekly Commentary podcast.
RSS | iTunesAt roughly 5% annually, world GDP growth from 2004-07 was well above its speed limit. This put a lot of pressure on the planet’s resources, and tested the limits of existing infrastructure – particularly in emerging markets. The Southern Cone is no exception, facing critical constraints in energy infrastructure. Will the region’s growing energy deficit constrict near-term growth?
The big three Southern Cone countries – Brazil, Argentina and Chile – collectively grew by 6.1% in the 2004-07 period. This naturally increased their appetite for energy, as global demand for the region’s primary commodities and industrial products expanded the needs of intensive energy users, and as prosperity increased domestic energy usage. This has put a strain on energy sources in the region, raising resource prices and putting critical energy trade flows at risk.
Brazil has large energy resources, but is also a huge energy consumer. Brazil produces just over half of its natural gas needs, depending on imports for the balance. Demand for electricity continues to test generation capacity, with new additions to supply only just managing to keep pace with growing needs. Oil reserves are large and growing, but again, production just meets today’s 2.2 million barrel-per-day requirement. Domestic ethanol production has done a lot to fill energy shortages, but given Brazil’s overall energy needs, import flows are vital to the economy.
The situation is even more critical in Chile. Although its energy consumption is about one-seventh of Brazil’s, Chile has far smaller domestic energy sources. As such, Chile consumes 16 times more oil than it produces, 7.6 times more natural gas, and imports almost all of the coal it uses. Moreover, electricity supply went into deficit in 2005, and hydro generation – accounting for half of total generation – has been crimped this year, owing to drought conditions during 2007. Energy rationing has helped, for now. Securing Chile’s energy future will require dependable import sources and much new investment.
In contrast, Argentina is an important regional energy exporter. With the largest natural gas reserves in South America, Argentina is a key supplier to Chile and Uruguay. But that is changing: strong economic growth together with price controls have caused internal gas demand to swell, while underinvestment has constrained supplies. To secure internal supply, Argentina has cut back on exports, and has tried, with modest success, to stimulate investment.
On the surface, the situation looks grim. But the energy importers are responding. Brazil is actively pursuing new oil and gas plays, is investing in LNG terminals and stimulating construction of new electrical generation facilities. Likewise, Chilean investments in hydroelectric and coal-fired generation, and renewable production capacity, will come online as soon as 2009. In short, constrained energy supplies have spurred a regional energy investment boom that will persist in the medium term – one that local and foreign investors are participating in.
The bottom line? The Southern Cone faces an energy deficit. Slower economic growth and more normal weather will give needed short-term relief. Further out, the deficit is still a big problem. But unlike the region’s past deficits, investment, not retrenchment, is the antidote this time around.
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