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From Rockies to Andes energy emergency spreads May 15, 2001

By Susan Schneider

MEXICO CITY, (Reuters) - It began with programmed blackouts in California, which are expected to plunge millions into a summer of candlelight.

Then Brazil began creeping toward a power crisis, forecast to strike in full in June with widespread outages.

But what started with a spate of blackouts now appears to have all the signs of an Americas-wide plague, as an energy emergency seeps southward from the Rockies to the Andes.

In the United States, the malaise is taking hold because of scant power supplies in the West, now threatening Texas and the Northeast as well. It is also being felt in tight refining capacity, which officials say could send gasoline prices shooting toward $3 a gallon during the summer driving season.

In Brazil, arid weather in the past two years has drained the hydroelectric plants that supply 90 percent of the nation's power, making blackouts unavoidable for the rest of the year.

In Mexico, blackouts also loom without prompt investments in power generation and a dearth of investment in natural gas exploration is set to send costly U.S. gas imports soaring.

Though it is too early to gauge the toll of the Americas energy epidemic, there is little doubt that the crisis is already stifling economic growth in the United States, Brazil and Mexico -- three of the hemisphere's most vital economies.

And unless governments and companies find ways to reverse the region's crushing lack of infrastructure, capital and economic expansion are likely to dim along with the lights.

``It's very important that the big (economic) engines continue to grow,'' both to keep trade flowing and to maintain investor sentiment, said Sondra Scott, director of Latin America for Cambridge Energy Resource Associates.

``We don't want to see investors shying away from the region'' because of infrastructure failings, she added.

CREAKING POWER GRID

The first hints of the hemisphere's energy problems came last year, when California's power grid began to show cracks. A key factor in the breakdown was flawed deregulation that capped consumer prices but let wholesale prices soar, leaving utilities with billions of dollars in debts to generators.

The Golden State is under fire for failing to invest in its energy infrastructure and attempting to conserve its way out of demand growth instead of building new plants.

Now, fresh from last year's breakneck U.S. economic expansion, California faces some 260 hours of rotating electricity blackouts this summer. Texas, New England and New York City are also at risk for outages, the North American Electric Reliability Council (NERC) said on Tuesday.

On top of the electricity shortfall, a long stretch of underinvestment during lean years in the oil refining industry has left the United States poorly placed to meet growing demand for fuels like gasoline and heating oil.

``It's a failure to be farsighted complemented by increasing use of gas-guzzling vehicles,'' said George Grayson, an oil expert at the College of William and Mary.

NOT ENOUGH WATER

In Brazil, a spate of bad luck has played a role in the coming power crunch. Two years with too little rain have failed to replenish reservoirs, now at about one-third capacity instead of the 50 percent needed to last through the end of the dry season in November.

But the longer-term issue, analysts said, is that Brazil has failed to resolve regulatory snags that are impeding the construction of gas-fired power plants. One critical wrinkle is the dollarized pricing of natural gas, which is adjusted every three months to the local real currency.

Companies see the price structure as too risky and have frozen 55 gas-fired power plant projects representing about 18,000 megawatts -- about one-third of Brazil's existing capacity, said BBV energy analyst Oswaldo Telles.

The impending power crisis is already expected to take a bite out of economic growth. Merrill Lynch slashed its Brazil 2001 outlook to 3.4 percent from 4.0 percent, and BBV will shave between 0.3 percent and 1.73 percentage points off its 4.0 percent forecast for the year, depending on the size of power cuts.

Given Brazil's role as South America's economic powerhouse, analysts said it is a safe bet the energy deficit will pinch the economies of Argentina and other neighbors.

``There is a natural tendency for this to affect the region,'' said Telles.

EMERGENCY IN THE MAKING?

Mexico, Latin America's No. 2 economy and a major energy producer, has yet to sink into a full-fledged power crisis, but a political logjam in Congress already spells trouble for a power reform desperately needed to lure private capital to the state-run industry.

Most estimates show that Mexico must at least double its 35,000-megawatt grid in the next decade to meet fast growth in power demand, an upgrade that will cost at least $50 billion.

The government insists existing projects will meet power needs until 2004. But analysts said the forecast assumes all projects come on line on time and warn that Mexico could see limited outages in the next couple years with electricity reserves already tight.

But even if Mexico has breathing room to tackle its energy issues, it is still certain to endure trickle-down effects from the U.S. energy problems. Mexico sends about 90 percent of its exports to the United States.

``The economic cycles in Mexico and the U.S. have become more and more synchronized,'' said ABN-Amro Latin America economist Fernando Losada. ``All we can say is as soon as we see the impact in California, the effect on Mexico will be immediate.''

http://www.individual.com/story.shtml?story=d0515134.701

-- Martin Thompson (mthom1927@aol.com), May 15, 2001

Answers

This is a surprise. I had no idea this energy crisis thing extended beyond the borders of the United States.

-- LillyLP (lillyLP@aol.com), May 15, 2001.

The Brazil crisis could be especially worrisome. The N.Y. money center banks have big, big exposure in that country.

-- Wellesley (wellesley@freeport.net), May 15, 2001.

Previous thread about Brazil. They have a very serious situation.

Brazil

-- Martin Thompson (mthom1927@aol.com), May 15, 2001.

"CREAKING POWER GRID

The first hints of the hemisphere's energy problems came last year, when California's power grid began to show cracks."

This timing strongly suggests that Y2K has something to do with why the infrastructure has deteriorated and "aged" so relatively suddenly.

-- Robert Riggs (rxr999@yahoo.com), May 16, 2001.