MDB & Energy Project: Regional Studies: Latin America Report

Chapter 4
Taking advantage of cheap abundant resources. What’s the use of saving?

Policies for energy resource development in Latin America have basically been aimed at taking advantage of cheap and abundant natural resources through intensive exploitation, rather than promoting energy conservation and efficient use.

Oil exporter countries, such as Colombia, Mexico and Venezuela, in an attempt to level their balance of payments, have intensified oil production—and they will press even harder for this course of action in the future. Colombia, in its National Plan for Development, has expressly defined its goal of intensifying and optimizing energy exports as a share of the overall growth of the Colombian economy, thereby placing emphasis on oil and coal exploration and export. Mexico focuses on oil export maximization as a means to improve its balance of payments, which is strongly affected by external debt.

In both cases, the dependence of the state on oil revenues is the key factor fostering intensive oil field exploration and exploitation, regardless of the fact that they are non-renewable resources that, sooner or later, will be exhausted. But this exploitation is fueled not only by financial needs. The need of developed countries in the North for cheap energy resources also plays a role.

By the end of the first decade of the next century, "OECD (Organization for Economic Co-operation and Development) countries will have reduced their participation in the oil global demand from 56% to 47% as a result of energy source substitution and more efficient use. However, they will become even more dependent on imports, since the reserves/production ratio is today, on average, eight years in Western Europe and 11 years in North America, while in Latin America it is 50 years. This is the reason for their deep interest in increasing the participation of Latin America in OECD." (Campodonico, 1996b)

"Increasing exploitation of regional reserves—given the political instability that still characterizes the Middle East and Russia—would further ensure oil supply, while a greater regional supply would contribute to a reduction of upward pressures on global pricing..."

Along the same lines, the countries that have natural gas fields—such as Argentina, Bolivia and Venezuela—are intensifying natural gas exploitation and building a vast gas pipeline network in the Latin American Southern Cone to deliver Argentinean and Bolivian natural gas to Brazil, Uruguay and Chile—hydrocarbons deficit countries. Natural gas is being promoted by the MDBs with a highly controversial "ecological" argument: it is "cleaner" than oil. The strategy for natural gas expansion as energy source, however, is outlined by economic considerations.

Most Latin American countries where private capital is involved in the electric power sector, and where natural gas is available, have turned to gas as a means for power generation expansion, shifting away from other sources, including hydropower. The explanation is basically that the private sector works on short-term economic horizons and is therefore unlikely to invest in hydropower projects of long-term return. The trend is thus to discard options of better natural-resource-use and environmental quality.

In Brazil, for instance, the strategy being pursued promotes gas-fueled thermal generation expansion. In order to attract private investors, projects are planned on the basis of a relatively cheap fuel and the possibility of shorter amortization terms than hydro-plants. Profitability, the key factor for private capital, is therefore the priority of the energy strategy.

A similar strategy is being developed in Mexico: most of the new plants currently being built or planned will be fueled by natural gas. The growing interest in gas can be explained—at least partly—by aggressive pressure from Canadian companies: Nova Corp and TransCanada Pipelines have tried for years to form joint ventures for generating, transmitting and distributing electricity produced with gas.

Natural gas and liquefied gas (LG) are sometimes referred to as truly clean energy sources, or in other cases as transitional fuels toward clean renewable energy sources. It should be noted, however, that despite the widely promoted environmental advantages of these resources, natural gas and LG are non-renewable resources, they maintain high levels of NO^x and CO² emissions and they have the additional problem of CH⁴ leakage. Therefore, even though they have some comparative advantages with respect to other fossil fuels, in order to make a proper economic assessment of their use, environmental costs and "exhaust costs" should be internalized.

The new model of corporatization and private-sector participation fosters an increase in fuel consumption. Consequently, even though the use of these fuels reduces CO² emission by—only—28% per unit of generated energy (according to the International Enterprise Union of Natural Gas), the increase in production and consumption implies a significant increase of contaminant gas emissions.

These fuels are more economical and can thus work well as energy for the less advantaged classes; but there is a limit to this. In rural areas, particularly in large countries, the cost of pipeline construction is very high. Also, natural gas and LG offer no advantage over fuels such as firewood with no commercial cost.

MDBs discourse conveniently magnifies the negative impacts of biomass while hiding those of other sources, such as LG and natural gas. The non-renewable character of these sources is practically ignored, while all biofuels are taken as one and considered bad per se. Is this objectivity or is it a disguised defense of certain economic interests?

In northern Colombia in a village called Piedra de Arroyo in the province of Atlantico, a natural gas pipe exploded by accident at the end of December 1998. Fifteen people died, 50 were injured, and others were trapped under the rubble of 50 houses destroyed by the explosion. Many other houses were damaged and over 200 people were affected, as declared by the Governor of the province of Atlantico.

Most of the dead, among them two children, showed signs of burning on their bodies according to the police report, which discarded speculations of sabotage as the cause of the explosion. According to the police report, "[i]t was an accident." The 57 cm-diameter gas pipeline runs under the center of this village of approximately 5,000 inhabitants. The pipeline was part of the national gas network operated by Promigas, a subsidiary of the US company Enron Corp., the main gas distributor on the Caribbean coast of Colombia. Enron is one of the main beneficiaries of the Latin American energy sector restructuring.

How many tragedies must still occur to stop the discourse of "clean" energy and high private-sector efficiency?

No serious steps have been taken in Latin America toward using clean and renewable energy sources. Initiatives to use such sources are isolated and marginal in the field of power production. In some cases, they even seem to be token projects to show that something is being done. No real effort is being made to foster these alternative sources, while wide promotion is carried out for natural gas, which—although to a lesser extent than other conventional sources, oil for example—is also a source of pollution. Despite the discourse, the real motives for supporting this policy are economic (energy cost reduction) and not a true environmental concern.

The alleged goal of fostering the use of clean energy sources and introducing environmentally sustainable production and consumption patterns is not consistent with the regulatory reforms of the sector. On the contrary, clean renewable sources are not, in general terms, competitive in a wholesale electricity market. As a rule, their economic costs are higher than natural gas-fueled conventional generation.

Within the logic of the new regulatory frameworks, the means for incorporating renewable energy would be as follows:

If the MDBs do not encourage the incorporation of these or other incentives in the power sector, it will not be consistent with its alleged goal of sustainable energy development.

Colombia’s national development plan, for instance, explicitly states that the use of alternative energy sources, where economically feasible, is a priority. Few specific efforts are being made in this sense, however, either in Colombia or in other Latin American countries. Alternative energy sources, despite their significant potential, play only a marginal role in the energy matrix of all the countries of the region. For these potentials to be effectively developed within the capitalist market logic, steps should be taken, such as those mentioned above, that would make the intensively exploited conventional sources more expensive than alternative sources. In other words, if, in addition to current costs, future costs are considered—costs that will be paid by future generations or even by the present one, non-polluting, clean alternative sources will be competitive under the capitalist logic.

New renewable energy sources—including biomass, hydraulic, geothermal, wind and solar—are mostly used in isolated rural areas. Four features favor the use of renewable energy in these areas: 1) low demographic density and long distance from demand centers; 2) extremely difficult geographic characteristics; 3) abundance of such non-traditional resources; 4) greater job generation as a result of the use of local resources.

Latin American energy policies—and those of the MDBs that support these policies—are focused, in general, on energy supply and on developing and exploiting the existing natural resources. Their emphasis on energy conservation and efficient use is minimal.

The opinion that energy conservation should be prioritized in developing countries is, however, gaining followers on the grounds that:

It is important to distinguish between technical and economic efficiency. Whereas reducing the amount of energy required to produce a certain article without increasing the use of other inputs, ie, improving technical efficiency, is desirable in itself, it may not result in economic efficiency if excessively large investments are required to obtain such reduction. A technology with a certain technical efficiency may be economically efficient in one economic context and not in another because of differences in relative prices.

There have been no improvements in energy efficiency in Latin America despite the reforms. On the contrary, efficiency has decreased in Latin America, as shown by the energy consumption/GDP ratio as well as by other indicators. Between 1985 and 1995 the average Efficiency Rate for Latin America (energy consumption/GDP) worsened, going from 2.51 thousand bpe (barrels of petroleum equivalent) per million US dollars of GDP to 3.07 thousand bpe. This is to say that, on average, 22.3% more energy was required per product unit.

Low energy efficiency has its origin on the supply side. In the case of hydrocarbons, there are excessive losses in oil and derivatives production, transport and distribution; additionally, the low degree of exploitation of gas in the oil fields of several countries of the region is quite noticeable. In like manner, in the electric power subsector, energy losses occurring between generation and consumption are alarmingly high.

Although there are no available statistics at the regional level on the evolution of energy efficiency in transport, the studies carried out in several countries of Latin America and the Caribbean (LAC) indicate that fuel consumption for road transportation is considerably higher than it is in industrialized countries.

In the residential sector, the increase of commercial fuel for cooking has led to higher energy efficiency. However, studies carried out by OLADE (Organización Latinoamericana de Energía/Latin American Energy Organization) in several countries of the region show that the energy efficiency of household appliances can still be improved significantly. These studies also show a similar situation in the commercial and service sectors.

Available data show that in Latin America and the Caribbean, there is a significant energy conservation potential, and indicate that in the short and medium term the specific consumption of hydrocarbons and electricity could be reduced by 15% to 20% and 10% to 15 % respectively.

In Mexico, for instance, the efforts made by the FIDE (Trusteeship for the Assistance to the Electric Power Sector Energy Conservation Program) have resulted in the saving of 5,400 gigawatt hours, approximately 5% of the national power consumption for the period 1990-1995.

LATIN AMERICA ENERGY EFFICIENCY RATE
(Energy consumption/GDP ratio) 1980 and 1995*

	1980	1995
1. Countries that showed improvement
Uruguay	2.28	1.98
Jamaica	4.98	3.45
Guyana	10.83	8.45
2. Countries that did not show improvement
Panama	2.43	2.47
Chile	2.52	2.51
Dominican Republic	2.67	2.68
Costa Rica	2.90	2.81
Brazil	2.78	2.86
Colombia	3.25	3.32
3. Countries that worsened
Barbados	1.72	1.98
Argentina	1.84	2.03
Ecuador	2.51	2.83
Mexico	2.91	3.13
Guatemala	3.13	3.40
Bolivia	3.17	3.43
Peru	3.41	3.77
Paraguay	3.52	3.99
El Salvador	4.22	4.67
Honduras	5.17	5.68
Nicaragua	4.68	6.48
Trinidad and Tobago	1.91	7.80
Haiti	9.03	10.79
LATIN AMERICA AND THE CARIBBEAN	2.51	3.07
* Energy consumption measured in thousand Bpe and GDP measured in millions of 1980 US$

According to the supporters of the neoliberal paradigm, energy inefficiency is caused:

From this perspective, low prices imply less revenue and hence a disincentive to the private sector. The fact that low prices also imply greater equity in access to energy is disregarded. There are two clashing conceptions of energy: one conception considers energy a public service, access to which should be guaranteed by the state to all population sectors, even where it does not yield commercial revenues; the other conception is of energy as a merchandise that is meant to ensure profit to the energy enterprises, regardless of groups who may have to do without.

The main objective of the structural changes now underway in the Latin American energy sector, according to neoliberal supporters, is to achieve a greater economic efficiency. From their point of view, the areas that are competitive by nature should be de-regulated as their optimum functioning is accomplished in a free-market environment. Other areas should be regulated because they are monopolistic market segments.

The structural reform of the sector, say neoliberal supporters, should bring about positive effects in terms of energy efficiency, through energy pricing and the institutional restructuring of supply companies. In an efficient market, prices would not be low enough to serve as a disincentive for energy efficiency. Hydrocarbons suppliers and power generators would not survive in a competitive market at their current level of inefficiency. Also, present levels of energy losses in transmission would be unacceptable.

Supporters of structural reform do not question their economic model, nor do they recognize that it, in fact, encourages energy inefficiency.

The drop in efficiency is not mainly a technical problem; it is also the outcome of a particular model of development. This model encourages accelerated urbanization in Latin America and increased consumerism among its population. The concentration of population in big cities has increased energy requirements, both for residential use and for transportation. Consumerism promotes increased use of electric appliances and soaring numbers of cars—to the detriment of collective transport such as buses, trolley-buses, subway, trains—with the subsequent increase in fuel consumption.

Automobile transportation is the main consumer of hydrocarbons and the greatest atmospheric source of pollution in the Latin American energy sector.

Consumerism, which generates these negative impacts in energy use, does not result from the real needs of the population but rather from the needs of the modern economic machinery. This machinery fosters the emergence of needs that are sometimes real but are more often artificial or a status requirement. Furthermore, consumerism requires—at least in the Latin America experience—a deepening of inequity: A part of the population has to concentrate wealth so that it can consume goods and services that are not part of the "staples basket". Others—in ever growing numbers—do not even have access to the staples basket.

The conception of energy as merchandise in a private-sector open market encourages consumption above savings and hence stimulates inefficiency in energy consumption (in buildings, electric appliances, etc.). The global market, in turn, demands increasing energy expenditures for transport— which becomes a real extravagance—by imposing the transportation of an ever-growing amount of merchandise. Products are increasingly consumed in a place remote from their origin. The ratio between the energy unit contained in a food product for instance, and the energy required for its transportation, continues to increase.

Hence energy efficiency will be difficult to achieve within the current economic framework. Besides, the supply-side approach that prevails in government and MDB policies increases centralization, one of the most common problems of Latin America. The nature of conventional energy development fosters centralization.

Some vicious-circle problems arising from the supply-side approach are obvious. Areas of low economic development, hence low energy demand, are of low priority for energy suppliers, but lack of energy is, in itself, a key factor in retarding economic development.

Given the significant role of transport in energy consumption, a policy pursuing energy efficiency should incorporate some basic strategies for long-term transport development, such as reducing mobilization needs, introducing low energy-intensive means of transport, improving the efficiency of vehicle stock and promoting cleaner energy sources. The following radical solutions could be advanced:

According to Greenpeace, only 25% of the known oil, natural gas and coal reserves can be consumed without trespassing the ecological limit of climate change. Greenpeace calculations show that at the present pace of consumption and growth, this limit will be reached in 30 years. The greater consumption growth will take place in underdeveloped countries, which by that time will have reached the emission levels of the "First World".

If no change occurs in the present course of development, by the year 2030, the balance of the climate system will be irreversibly broken, with serious consequences for the habitability of our planet.