Latin America & Oil Prices: Mixed Impact

A drop of $1 in the average price of export crude oil equals a drop of $756 million in Venezuela's annual oil exports, experts say. (Photo: SIBCE)

Venezuela and Ecuador will be hurt by falling oil prices, Colombia and Peru less so, experts say.


Inter-American Dialogue

Oil prices are currently hovering around $85 dollars per barrel, down more than 20 percent from this year's high in June and their lowest level in years, amid concerns of a global economic slowdown and an oversupply in the market. Do you expect oil prices to fall further, hold steady, or increase? What are the implications for the oil-producing nations of Latin America if prices fall further?
John R. Auers, executive vice president at Turner, Mason & Company: The current sharp drop in crude prices was in many ways inevitable after a three-year run of exceptional stability. Like two equally matched arm wrestlers, competing forces trying to drive prices up (worries about supply due to conflicts and tensions in the Middle East) and push prices down (growth in supply from U.S. tight oil plays, among other factors) have fought to a stalemate since the beginning of 2011, with Brent trading in a narrow range centered around $110. As often happens in such situations, one side inevitably gains the upper hand, and momentum causes fast and steep movements. In this case, price bears, fueled by the reality of a surplus in world oil supply, worries about demand growth in Asia, renewed pessimism in Europe and the reluctance of OPEC to cut production, have overwhelmed the bulls (despite continued geopolitical instability). We expect this downward momentum will continue in the short term, with Brent prices likely falling below $80, a level not seen since 2010. Whether prices remain below that level, or even continue lower, is in the hands of OPEC, and more specifically Saudi Arabia. To bring world oil supply into balance, the Saudis will have to make real cuts, to levels approaching 8 million barrels per day, which we feel they ultimately will do. Based on this assumption, we have Brent prices returning to levels between $90 and $100 per barrel and remaining at those levels over the next several years (although visits above and below will no doubt take place).The lower crude price environment will certainly cause pain for all producers, including those in Latin America. However, given our view that most of the steep drop will be short-lived, this pain should not cause long-term damage. Given ongoing budget shortfalls even at higher prices, Venezuela will likely be the most affected. We don't believe the lower prices will dampen participation by Western oil companies in Mexican prospects post-reform, given the long-term focus of such investment.

Ramiro Crespo, president of Analytica Securities in Quito: Oil prices are likely to continue falling, albeit not necessarily as strongly as they have since June. It will be surprising if they fall below 2010 levels of between $72 and $75 per barrel. For Ecuador, because of its relatively heavy crude, this will imply a price in the mid-60s. The implications vary according to whether the countries have behaved with macroeconomic responsibility, as in the cases of Bolivia, Colombia and Peru, or gone on a full-out spending spree like Ecuador and Venezuela. The implications will be less dire for Colombia and Peru, even though they too can expect exploration budgets to diminish as oil becomes less attractive as an investment. In the case of fuel subsidizers, which also include Bolivia, the fiscal weight of subsidies will at least diminish. This will only prove limited solace. For Ecuador and Venezuela, a fall in the price of oil could prove an opportunity to reduce the resource curse, out of pure necessity. In the long run, this could prove beneficial as it will make it more feasible for responsible democratic governance to take hold. In the interim, however, there is a risk of resumed institutional uncertainty and perhaps even a return to the late-1990s turmoil. Ecuador's new hydroelectric plants are unlikely to provide enough cost savings to fully cushion the blow of lower oil returns.

Asdrúbal Oliveros, director, and Jessica Grisanti, senior economist, at Ecoanalítica in Caracas: We believe that oil prices will hold steady and will have negative implications in oil export countries, especially Venezuela. A prolonged drop in crude oil prices would not only reduce Venezuela's capacity to make payments on its foreign debt and PDVSA's debt. It would also seriously affect the current foreign exchange schema and would put Chavistas' parliamentary majority at risk by limiting their funds for campaigning leading up to the 2015 elections. The weight of oil revenues for the government, in terms of exports, incoming fiscal revenue and aggregate value, make it so that every dollar the price of crude oil drops on the international market, which in turn affects the price of the Venezuelan Oil Basket, has a significant negative effect on the nation. A drop of $1 in the average price of export crude oil, considering sales volumes near to 2.07 mb/d (excluding oil byproducts), equals a drop of $755.5 million in the value of annual oil exports. It's also important to remember that higher oil prices don't only mean more revenue for the government, but also that the administration has more freedom in deciding how to use the these resources.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor