Source: Latin America Advisor

Inter-American Dialogue: Over the past 10 years, China has loaned some $70.2 billion to Latin America for its energy sector alone, according to data from the Inter-American Dialogue’s China-Latin America Finance Database. How will Latin America’s energy sector be affected as China’s economic outlook and investment strategies evolve? How are low global oil prices changing China’s engagement with the energy sector in Latin America and the Caribbean? Is China responding to concerns about the environmental and social implications of the methods it uses when investing in the region’s energy sector? Will there be local unrest and pushback from the advances?

Matt Ferchen: When looking at the China-Latin America energy relationship over the last decade and into the near future, one country stands out: Venezuela. No Latin American country has established a bigger, or more problematic, energy relationship with China than Venezuela. And in turn, China’s engagement with Venezuela stands out for its sheer scale, riskiness, and now, instability.

In theory - and maybe at the beginning it approached this ideal - the relationship should have been simple and mutually beneficial: China needed oil and was willing to pay for a long-term energy partnership with Venezuela. And in turn, Venezuela sought to expand its oil export markets as well as to attract new sources of foreign energy investment; China fit the bill. What has gone wrong? Even before the dramatic drop in oil prices began in the middle of 2014, Venezuelan leaders’ politicization of the country’s oil resources and of PDVSA itself limited the expansion of oil flows to China. With the drop in oil prices contributing to the country’s steep descent into economic and political crisis, Venezuela is in an increasingly poor position to be the energy partner China had hoped it would be.

Yet China has not been blameless, its banks and oil companies misunderstood and miscalculated the direction and instability of Venezuelan politics and economic management, and so failed to anticipate the inevitable and harmful effects on Venezuelan oil management and output. Going forward, the immediate future for China-Venezuela oil ties rests on whether China is willing and able to work with Venezuela and possibly other countries and institutions to help put Venezuela and its oil industry on a more sustainable path.

This excerpt was republished with permission from the Inter-American Dialogue’s daily Latin America Advisor.