The Bolivian Paradox

Bolivia's Paradox – at - the best of the week's international financial media.

It was in the 16th century that Westerners first passed through Bolivia, and even back then it was the country's fabled wealth that had attracted them. Th'Conquistadores' (conquerors) had come to South America to seek out the legendary El Dorado, the place of abundant gold.

The legend of the 'golden man' had probably originated from a ceremony celebrated by the Muisca Indians. Upon his crowning, the new Muisca king was covered in a thick paste containing gold dust. He was then taken onto a raft and driven to the middle of a lake, where he plunged into the water so as to wash off the gold. Members of his entourage would carry out additional sacrifices by throwing items made of gold into the lake.

The Conquistadores subsequently plundered the nation's golden treasures and tons of historic items were molten into bullion and shipped to Spain. Their quest to Bolivia had paid off mightily, albeit at the expense of the indigenous culture.

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Bolivia became an independent nation in 1809, after seceding from the Kingdom of Peru in a struggle lead by Simon Bolivar. But the nation had to endure further unsettling periods, such as war with Chile during 1879 and 1883, as well as a war against Paraguay. Bolivia's landmass subsequently shrank considerably, and it lost both its direct access to the sea as well as regions rich in resources.

In case you've not been to Bolivia, let's have a quick geography lesson. La Paz, the country's most important city and the seat of her government, is located between 3,200 and 4,100 metres above sea level, making it the world's highest major city. In other parts of the country the Andes reach as high 6,500 metres.

Bolivia borders on Peru and Chile to the West, Argentina and Paraguay to the East, and Brazil to the North. Being nestled amidst such a large number of neighbours makes it a gateway to other Southern American countries.

The Bolivian paradox is that the country is simultaneously extremely wealthy as well as dirt poor. The thinly populated country is still mostly an agrarian society, and with an average annual income of less than $1,000 per head it is among South America's poorest nations. At the end of 2004, some $5bn in national debt weighed heavily on the government's finances.

Yet, at the same time Bolivia is the most important exporter of gas on the entire South American continent. According to a study carried out by British Petroleum, 0.5% of the world's gas reserves are located beneath Bolivian soil. That's a lot of gas for a tiny country of just 8.8m (0.0015% of the world's population).

The country's resources, however, are distributed very unevenly. Most of the gas industry is concentrated around the south eastern region of Santa Cruz. This happens to be the area where most descendants of the Spanish invaders live. The direct descendants of the Inca mostly inhabit the plateaus of the Andes, and the money earned by the gas industry bypasses them. Once again, the original inhabitants of the country are out of luck.

To get the country moving forward, a far-reaching privatization program was started in the 1990s. Private investors were sought in order to get the necessary funding for modernizing and expanding the gas industry. During the last five years, the listed energy companies Petrobras (Brasil), Repsol (Spain), Total (France), as well as British Gas invested some $3.5bn into their Bolivian ventures.

It turned out that the country's President, Sanches de Lozada, had underestimated the resistance that a considerable part of the population would put up against the country's new course.

Lozada had been educated in the United States, and he apparently had lost touch with the sensitivities of his home country's people. Under his reign a gas and oil pipeline was built across Chilean territory, so as to be able to export Bolivia's resources to the United States. But it was Chile that had taken away Bolivia's sea access during the 19th century, and many Bolivians still view the neighbouring country as their arch enemy. What's more, the United States is by many deemed the reincarnation of the Spanish Conquistadores. Selling gas and oil to them is deemed conspiring with the enemy.

In 2003, an uprising against the cut back of welfare payments started and Lozada's army violently put down the demonstrations. The death of about 60 protestors led to the movement only growing in size, and in October 2003 Lozada was driven out of the country.

Since then, gas companies have to pay 50% of their revenues to the government, as opposed to 18% previously. But even this doesn't seem to be enough to pacify the majority of Bolivians calls for a re-nationalization of gas and oil enterprises are rife. Because of these developments, foreign investment into the country's resources industry has come to a stand still.

For many Bolivians, the foreigners' involvement in the country's resource industry is akin to the Spaniards' looting of Inca gold treasures. The country is now at a crucial cross-road, and it has to decide between private property and foreign investment on one hand, or nationalization of key industries and a return to a Socialist model on the other hand. Currently, the latter option seems to be the most likely development.

State-run enterprises in almost all cases suffer from under-investment, and subsequent deterioration. Bolivia would be much better advised to encourage foreign investment given a suitable framework to let the locals benefit too so as to achieve an expansion of its energy related industries. The opposite is now likely.

Bolivia's lack of investment in the oil and gas industry threatens to have an effect on the energy supply of the entire South American continent and the ripple effects would sure hit the world energy markets as well as Europe. This alone won't make the gas price skyrocket, but it's yet another piece of the puzzle in the world's emerging new energy order.

For the years to come, a shortage of energy and price spikes are a much bigger possibility, than the opposite. And as far away as Bolivia seems to be, keeping an eye on such far off countries does help to get a better grasp of the big picture.

Yours truly,

Beat ErnFor the Profit Hunter Team