The pitfalls of protectionism shown by Brazil and Mexico

State companies also pursue political strategies not relevant to ó and sometimes at odds with ó the business of drilling. Iran, for instance, has just pledged to fund a refinery in Uganda. This makes no commercial sense, since Iran is struggling to develop its own small refining capacity (it rationed gasoline in 2006) and landlocked Uganda has no comparative advantage in refining. However, Iran may be increasing such overseas oil deals to complicate potential sanctions against its nuclear program. The problem is that inefficiency doesn't simply mean getting consistently less oil, or getting it slower. It can mean sharper slumps in oil production than with more experienced and efficient firms. In countries where oil revenues generate a significant fraction of the economy, such slumps wreak havoc on government budgets, leading to extravagant overspending or intolerable austerity. Greater state involvement in exploitation can therefore harm fiscal planning. Venezuela shows the dangers. 'Hugo Chavez has remade PdVSA (Venezuela's state-owned oil company) into a government puppet that spends liberally on social programs, but it consistently undershoots its production targets,' says Dr. Thurber. This means the terms of foreign contracts are frequently changed to balance the government books, deterring foreign investment, which further undermines oil production and thus government spending upon which the population increasingly depends. Similar policies mean Venezuela is now short of once-abundant coffee and sugar too. Protecting labor markets is, on balance, problematic if not incoherent. Mexico's oil group Pemex is employing foreign firms to help improve its low oil recovery rates at the same time as the Mexican government tries to increase the domestic labor share: it is precisely because its domestic industry has been unproductive that Mexico needs to invite foreign companies in. In Brazil, the offshore reserves in question are enormous and could deliver up to 1.3 million barrels per day. Maximizing the benefits of such a find would be best served by the competitive pressure of open bidding, yielding steadier tax revenue, from foreign firms as well as Petrobras. In the current crisis governments everywhere are tempted to intervene in markets but what makes sense during the good times makes sense during the bad times too: the patriotic solution is to let the market do the work. Adam Green is Editor of Exploration and Production: Oil and Gas Review, an independent international journal published in London.