Latin American countries such as Mexico and Brazil have been identified as prime locations for the expansion of oil for some reasons. One of the reasons is that by 2025 the world will be requiring double the number of oil barrels it is using now and the already existing supply countries will not be able to sustain this. Investing in other prime areas like the Latin American countries is the left option (Whelan, Trevisani P., and Olson 2018). A second reason is that a country like Mexico offers cheaper opportunities as compared to the United States shale regions. The cost of entry into the Latin American countries is also low making many investors to identify the area as a prime location for the oil market expansion.
Oil companies are taking some several gambles and risks by deciding to expand into both Brazil and Mexico. One of the risks that they are taking is that of political risk. An example of this is the coming of the elections that will be held in both the Latin American countries. The leaders elected in might decide to come with new policies regarding the investors in the oil expansion programs (Whelan, Trevisani P., and Olson 2018). One of them might be that foreign investors should move out and pave the way to the countries investors. This would be a massive blow because their total investments would have gone into waste if such leaders are elected in. Another risk would be that of the economic risk where the foreign levies might be raised making it hard for them to continue investing in the oil countries.
Some advantages and disadvantages are obtained when a company decides to be a first mover in a country that has just liberalized its trade policies. One of the advantages of this is that they have a higher chance of obtaining the highest shares in the investment countries as compared to the investors that might come later. Another advantage is that the companies benefit from lower starting costs that are always set to attract investors in a country (Whelan, Trevisani P., and Olson 2018). Those who come later may not enjoy this especially if the market has already gotten established. However, one of the disadvantages that they might face is that they might be the first losers if whatever they bargained is not precisely what they get. Such a scenario may appear for example when the oil mines dry up after the first few drills leading to them being declared empty. To avoid this, it is advisable to wait and watch before deciding to invest.
Natural resource-based firms such as oil companies have been identified to be highly exposed to political risk due to several reasons. The natural resources are mostly the primary sources of government revenues, and in case the government wants to increase its revenue margins this docket is likely to be the first one (Whelan, Trevisani P., and Olson 2018). This leaves the investors in the oil companies at high risk of getting themselves in such a scenario. Another reason as to why they stand exposed to political risk is that most of the levies and policies regarding the natural resources are set by the parliament of the country. The parliament is made up of politicians, and they might make political decisions towards the issue of oil companies and foreign investors.
Whelan R., Trevisani P., and Olson B. (2018). Major Oil Companies Embrace Latin America