Recently, some Latin American countries have adopted policies to nationalize their natural resources, steps that have profound implications for the international energy market, especially the oil market, and have aroused widespread concern in the international community.

The initiative was taken mainly in resource-rich countries and targeted largely at oil and natural gas companies. Latin America is endowed with abundant oil and natural gas reserves, with Mexico and Venezuela ranking among the world's top 10 oil producers.

Venezuela boasts the largest oil reserves in Latin America. It has proven reserves of 78 billion barrels and potential heavy oil reserves of 238 billion barrels in the Orinoco oil belt. Mexico has proven and potential oil reserves of about 46.9 billion barrels, among which 17.6 billion barrels have been verified. Newly discovered oil fields in deep waters of the Gulf of Mexico hold estimated oil reserves of 54 billion barrels. Ecuador and Colombia are blessed with rich oil resources, too. In addition, huge natural gas resources have been found in Venezuela, Bolivia and Peru.

On May 1, Bolivian President Evo Morales issued a formal decree to nationalize his nation's oil and gas resources. "The time has come, the awaited day, a historic day in which Bolivia retakes absolute control of our natural resources. The looting by foreign companies has ended," declared Morales.

The government sent armed forces and engineers of the state-owned Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) to the oil and gas fields run by foreign companies, and demanded these companies agree on new contracts within six months to hand over majority control to YPFB. If they do not accept these terms, the foreign companies will be forced to leave Bolivia. At the same time, the government stressed that it would not confiscate the assets of the foreign companies.

Bolivia has natural gas reserves of up to 1.38 trillion cubic meters, behind only Venezuela among Latin American countries. About 20 foreign companies from countries such as the United States, Britain, France, Spain and Brazil have an investment of over $3 billion in the country's natural gas industry. The Morales administration's decision to nationalize the industry drew close attention from these countries.

Venezuela is among the first countries to practice a nationalization policy. President Hugo Chavez has been advocating government control over oil and other natural resources ever since he took office in 1999. Venezuela is the world's fifth largest oil exporter and the only OPEC member in Latin America.

The soaring oil prices in the international market have made a significant difference to the Venezuelan Government's efforts to maintain political stability and economic development, and to the implementation of some of its social policies. As a result, the Chavez administration became even more determined to nationalize oil resources. The government raised royalty payments by a large margin, while proclaiming ownership of over 32 small oil fields. It also raised its tax rates on oil companies from 56.6 percent to 83 percent.

In another development, an oil bill passed by Ecuador's Parliament in April required foreign companies to hand over 50 percent of their profits to the government.

Reassessing privatization

The nationalization drive can be attributed to Latin American countries' reexamination of the privatization process their energy sectors underwent years ago, which has ended in a situation where the Latin American nations benefited little while foreign oil companies reaped staggering profits.

They are craving the lavish profits from crude oil production in the hope of using the oil wealth to boost their economies and address social concerns.

This is almost universal among Latin American countries. Take Bolivia for example. One of the prime reasons for its nationalization policy is the decline in natural resources and its political needs. Bolivia boasts rich oil and gas reserves but is among the poorest nations in Latin America. The question of whether to nationalize the oil and gas sectors has haunted the Bolivian Government for a long time, a dilemma that led to domestic conflicts, social turmoil and political instability. Morales always brands himself a firm nationalist and a guardian of Bolivia's resources. It is no wonder that nationalizing natural resources was placed at the top of his agenda after he became the country's president.

A shared feature of Latin American countries' nationalization moves is that the scope of nationalization is limited. The countries did not completely reject foreign investors, nor did they confiscate foreign capital or eject foreign companies. Instead, they allowed foreign companies to keep their shares in oil production and business operations in these countries. The nationalization initiative is therefore aimed at exploring a new pattern of cooperation where the government plays a leading role in natural resource exploitation, business operations and sales.

The nationalization strategies impacted crude oil prices in the international market, having far-reaching repercussions. At present, the international community is mired in troubles due to the political wrangling over a diplomatic solution to the Iranian nuclear issue, the unstable situation in Iraq and terrorist attacks. Against this backdrop, challenges posed by Latin American countries' nationalization of their oil and gas resources rendered the already unstable international crude oil market even more vulnerable. One day after Morales issued the nationalization decree, crude oil futures in London and New York hit record highs, reaching $74.97 and $74.9 a barrel, respectively.

Some government leaders and heads of internationally renowned energy companies offered various comments. Some of them showed understanding, saying international energy companies must accept the fact that oil producers increasingly tend to embrace a nationalistic approach and attempt to revise business contracts.

The higher oil and gas prices are, the more likely people are to think of nationalism. This is a new fact. In the final analysis, the government is always the boss, they say. However, others are critical of the move. They are worried that the conflict between oil nationalism and Western oil companies will lead to insufficient investment in oil exploitation, and inadequate oil production will result in an even tenser oil supply, further driving prices up.

Martin Bartenstein, an Austrian minister, voiced sharp criticism against the move. "If you want to harm your industry, you nationalize it," he said. "It's a step backward. It's not encouraging investors."

Reshaping the political order

British Prime Minister Tony Blair called on the Bolivian Government to use the nation's energy resources "responsibly" and "in their own economic interest." Some observers believe that skyrocketing international oil prices fueled the oil producers' passion to nationalize energy resources, a strategy that not only has jeopardized the investment plan of international oil companies but also may reshape the future international energy political order, escalating the political conflict in the energy field.

Some media outlets also commented. Bill Farren-Price, Deputy Editor of the Cyprus-based Middle East Economic Survey, said it is part of a trend of governments taking strident action to either protect national resources or to nationalize formerly privately owned oil resources amid the environment of very high oil prices. Other media sources such as The Washington Post held pessimistic views.

This camp of critics believes that Morales' tough action to seize oil and gas fields demonstrates to the United States that some countries in Latin America are trying to eliminate U.S. influence. It shows the international energy market will be more unpredictable, a trend that will prompt the United States to increase its domestic energy production. According to them, it will be increasingly more difficult for Washington to attempt to control the whole Latin American region.

In Latin America, an overwhelming majority of countries backed their neighbors' nationalization policy. Of course, different voices were also heard. Brazil, the biggest Latin American investor in Bolivia's natural gas industry, was most severely affected. After Bolivia announced the nationalization policy, the Brazilian Government and companies sent delegations to hold negotiations with the Bolivian Government.

Brazilian President Luiz Inacio Lula da Silva said Brazil wanted to import gas from Bolivia because it is interested in helping the poor Bolivian people, and Bolivia is interested in helping Brazil as Brazil needs gas. However, he continued to say that as a large country, it is impossible for Brazil to rely on any one supplier. He believes the two countries need an agreement that is conducive to both. Meanwhile, he pointed out that Brazil would be self-sufficient in gas by 2008.

An opinion poll conducted in Argentina shows that 74 percent of the respondents agreed or strongly agreed that the Kirchner government would follow Bolivia's steps to nationalize oil and gas resources through legislation. The considerable rise and fluctuations in international oil prices have brought about huge profits to Latin American oil producers but at the same time aggravated the energy crisis of oil importers in the region, especially countries in Central America and in the Caribbean region, by increasing their foreign exchange expenses.

In an effort to tackle the continued price rises, countries in Latin America have pumped more investments into developing their domestic oil industries, while carrying out oil cooperation programs and pressing ahead with regional energy integration by establishing regional oil cooperation organizations to guarantee a sustainable development of the regional economy. To date, several regional cooperation organizations have been established, such as Compañia Petrolera del Sur and Compañia Petrolera del Caribe. Blueprints have been rolled out for the South American gas pipe project and energy cooperation between Mexico and Central American countries. Some bilateral energy cooperation projects are also under way.

Latin America's nationalization of oil and gas resources has certain effects on China, too. China imports a large amount of oil each year to meet its rapid economic development. Because of higher oil prices, China has to spend more foreign exchange to purchase crude oil. Moreover, the oil price hikes in the international market impact the fuel prices in its domestic market. Latin America is one of the destinations for Chinese oil companies in their "go global" campaign. China's international energy cooperation started with Latin America and their cooperation has posted initial success.

China is currently cooperating with Venezuela, Peru and Ecuador in the energy field. It has also begun to negotiate with Bolivia for prospective energy collaboration. Latin America is gradually becoming an important region for China's oil companies to make investments and conduct cooperation. Whether the energy cooperation between China and Latin America can achieve success has a great bearing on both parties. China stands for a win-win outcome in this cooperation.

The author is an associate research fellow with the China Institute of International Studies