For more than a decade, America’s relationship with Latin America could most accurately be described as unfocused engagement, driven by reactions to events or crises at best and benign neglect at worst. Apart from intermittent efforts to secure free trade agreements (NAFTA and CAFTA), combat drugs (Plan Mérida and Plan Colombia), and weigh in—often too late and too sheepishly—to political events (Honduran Presidential crisis or President Hugo Chavez’s saber rattling), the US has failed to engage the nations of resource-wealthy Latin America in any strategic manner.

This lack of attention to our closest neighbors—and some of our strongest allies—is quite alarming given US dependence on Latin America to provide our energy. Currently, more than one-fourth of imported oil comes from Latin America (and almost 50% from the Western Hemisphere). In 2009, the top sources of US imported crude oil (and their percentages) were Canada (21%), Mexico (11%), Venezuela and Saudi Arabia (9% each), Nigeria (7%), Russia (5%), Iraq, Algeria and Angola (4% each), Brazil (3%), Colombia and Ecuador (roughly 2% total). As is widely known, America imports more than 65-70 percent of its energy needs, which means that we are vulnerable to disruptions in the supply chain and to price volatility, which are affected by domestic political and economic conditions in oil-exporting countries upon whom we depend.

In 2007, speaking at the General Assembly of the Organization of American States, US Secretary of State Condoleezza Rice said, ”[W]e are eager to expand our cooperation on energy with more [Latin American] countries […]. Our goal should be nothing less than to usher in a new era of inter-American security in energy.” In June 2009, President Obama pledged to engage with Latin America on issues of energy, security and trade, and attended the Fifth Summit of the Americas in Trinidad & Tobago. But very little has happened in the last fifteen months. The Administration’s blind spot to the importance of Latin America in our energy security matrix is revealed by the disappointing fact that, during Secretary of State Clinton’s visit to Ecuador in June 2010, her almost 4,500 word policy address on ‘Opportunity in the Americas’ contained no mention of energy—not a single word.

While our government takes for granted the oil wealth of Latin America, several domestic factors in the resource-rich countries in the region threaten US energy security. Mexico, which replaced Saudi Arabia as our 2nd largest supplier in 2008, is by no means a stable supplier of fuel. Years of inadequate investment in the national oil company Petróleos de Mexico (Pemex) have resulted in falling production rates; production output of crude oil fell 17.5 percent during the period 2004-2008. Although the Mexican government approved a broad set of oil sector reforms in 2008, including the establishment of a new regulatory body (the National Commission on Hydrocarbons—CNH), actual implementation of the reforms—viewed by many as ‘timid’—is behind schedule, thus having no impact on reversing the downward trend in production output.

In addition, the violence in Mexico, which is still largely viewed as a border security issue, has the potential to impact Mexico’s oil sector and its ability to sustain its current level of exports. According to Pemex, the number of illegal pipeline taps has quadrupled in the last five years, rising from 102 in 2004 to 462 in 2009. In 2009, the Mexican drug cartels diverted and smuggled over 8,500 b/d of petroleum products, worth approximately $46 million. While most of this illegally acquired oil was smuggled into the US, the act is a clear signal that the drug cartels are willing to use energy as a weapon in their battle against the Mexican government, which has in turn taken to using more aggressive tactics against the violent cartels. If the escalation continues, the next stage in this game of hostile engagement may involve the Mexican drug cartels taking a page from the playbook used by the Colombian guerillas, Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army, that have caused millions of dollars in physical and environmental damage by attacking energy pipelines and infrastructure. Either way, the falling production and violence in Mexico may affect the surety of oil imports from our closest ally.

Over the course of the last 3-4 years, many of our oil-rich neighbors have nationalized some portion of their hydrocarbon sector, which has frequently entailed heavy-handed expropriation of assets from private companies. Venezuela, our 3rd biggest supplier of oil, has been the most egregious violator. Venezuelan President Hugo Chavez launched a major nationalization drive in 2007 and has since nationalized assets of several international energy firms, including ExxonMobil, British Petroleum (BP) and ConocoPhillips, in addition to forcing many other companies to pay higher royalties. As recently as June of this year, state-owned oil company Petróleos de Venezuela (PDVSA) asked the Venezuelan National Assembly for approval to nationalize 11 oil drilling rigs currently owned and operated by a US company.

Unfortunately, the effects of Venezuela’s market-destabilizing actions are already evident. Venezuela’s oil sector is collapsing under the weight of its own egocentric dictator and his political rhetoric, which has stressed PDVSA operations and scared away foreign investment, resulting in a decline in production and a strain on Venezuelan refining operations. Recent estimates suggest that PDVSA has amassed more than $21.4 billion in debt to oil service companies. In 2009, Venezuela’s import of fuel purchases increased 56 percent, while its exports of fuel products fell by 17 percent. In both the near to long term, this fall in output, if prolonged, may significantly impact US energy security. To illustrate this, consider that during a strike by Venezuelan oil workers in 2002-2003, Venezuelan output of heavy crude oil slowed dramatically, raising US gas prices by 24 percent during the 10 week strike.

But Venezuela is not the lone culprit. In 2006, Bolivian President Evo Morales moved to nationalize his country’s oil and gas reserves, the second largest proven reserves in South America, and to take control of the commercial and production chain. He ordered the military to occupy Bolivia's gas fields and gave foreign investors a six-month deadline to comply (with higher royalties and taxes) or leave. Bolivia’s Andean neighbor, Ecuador, has also been slowly encroaching upon private oil companies operating in its territory. In 2006, Ecuadorian President Rafael Correa revoked the contract of US-based Occidental Petroleum, operating in some of its Amazon oilfields. Soon after, he imposed a 99% windfall revenue tax on foreign energy. Since then, Ecuador has expropriated two blocks belonging to Anglo-French oil firm Perenco over tax disputes, claiming that the company owed millions of dollars in ‘windfall’ taxes. In a bold move, President Correa announced this past April that he was going to send a bill to the National Assembly that would give him the power to nationalize foreign companies that refuse to sign new state-proposed agreements.

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