Do I Hear a Bubble Bursting?

Tomorrow the leaders of Venezuela, Bolivia, Brazil, and Argentina will meet to try and reach some kind of agreement after President Evo Morales of Bolivia sent troops to occupy 56 gas fields and installations while demanding foreign companies give up a majority[51%] of their stakes in these fields to Bolivia's state firm YPFB.

Brazil's Petrobas has halted any further investment into Bolivia due to the extreme uncertainty this seizure by soldiers engenders. To date Petrobas has invested $1.6billionUS into these Bolivian fields since the 1990s to supply 50% of Brazil's natural gas requirements while consuming 70% of Bolivia's natural gas exports.

Not content with taking these fields and installations hostage, Bolivia is also demanding an increase in the tax generated from the two largest fields. They want to raise it from 50% to 82% or a hike in the tax rate of 80%. Talk about killing the goose laying your golden eggs if Bolivia is serious about this tax hike.

I am hoping this is a negotiating ploy on Bolivia's part. That President Morales is demanding so much while betting on the sheer size of Bolivia's natural gas supply will force countries like Brazil and Argentina to negotiate a somewhat higher price on tax for greater revenues and perhaps if Morales is adroit to negotiate a gradual phase over from companies like Petrobas, Repsol YPF, and Total SA to the state run YPFB.

But if President Morales proves intransigent towards negotiating a compromise then things may truly spiral out of control as Brazil and Argentina face shortfalls to their energy needs. Those countries' citizens may well back their governments into a corner as the shortage hits home and they, the governments, may see as the only door out is a military solution if other supplies can not be found quickly and affordable.

I fear that President Morales may prove resistant to compromise since his idol, President Hugo Chavez of Venezuela will be there also. Venezuela is the number one producer of natural gas in South America and Bolivia being number two. Venezuela is also the world's fifth largest oil producer, well it is supposed to be. After all President Chavez is bartering thousands of barrels of oil to Cuba while this past winter Venezuelan owned CITGO, in a media spotlight that included members of the Kennedy family, sold at below market value heating oil to many needy Americans in the Northeast. So it seems this South American country is awash in excess oil. Thanks to LittleGreenFootballs, found this unsettling article. Since Chavez has nationalized the Venezuela oil industry, production has fallen by over a million barrels a day and maybe 10,000 oil wells are no longer in operation. The author of the article notes how adept Venezuela is in playing the world markets and that maybe one reason why Venezuela is possibly buying oil from Russia. The author goes on to lay out why he thinks that is a wrong conclusion: those oil wells out of production and loss of trained personnel caused by Chavez seizing the oil industry are his primary reasons to think Venezuela is about to hit bottom.

Now here comes President Morales of Bolivia following in Chavez's footsteps by trying to nationalize the natural gas industry. Now if Bolivia, with Venezuela's support, refuses to budge from the tax hike and nationalization at these negotiations; Brazil, Argentina, and those oil companies could be faced with only a few choices:

1. Capitulating to Bolivia's demands and see if their economies can handle the jump in energy costs. - Duh, late addition but so obvious. If they accede to Bolivia's demands, then nationalization of industries across South America will gather momentum with possibly dire consequences.
2. Find another supplier - like Venezuela since Venezuela also exports natural gas, it is planning to build a pipeline through Brazil to Argentina, and by becoming these two countries supplier it allows Venezuela to keep hidden any shortfalls over in the oil sector for a little longer as Chavez steals from Peter[natural gas] to pay Paul[oil].
3. Or the counties will go to war to recover what has been illegally seized by Bolivia - which would allow Chavez to distract his citizens from the oncoming collapse of the house of cards Chavez has turned the oil industry into by whipping them up in a fervor to help Bolivia protect itself from those invaders from Brazil and Argentina.

I really hope they can sort things out peacefully when they meet in Argentina or a lot of people will be suffering the consequences of their leaders' inflated egos.