A critical time for oil

0
580
Creative Commons
Creative Commons

The recent downturn in global oil prices is impacting financial markets, already shaken by weak economic prospects for Europe, a slowdown in China, and fears that ebola will continue to spread across West Africa, resulting in 10,000 new cases every week, and with a worrisome 70 percent mortality rate.

Sanctions against Russian businesses over the ongoing conflict in Crimea and Eastern Ukraine, as well as a long and costly offensive against ISIS militants by the United States and its regional allies, has also contributed to a climate of fear and nervousness on Wall Street.

In its seemingly unstoppable slide, oil prices dipped below US$80 per barrel Wednesday for West Texas Intermediate, the U.S. crude benchmark. Led by a surge in U.S. shale oil output from hydraulic “fracking” and sluggish demand by the Eurozone for oil, Saudi Arabia, the largest member of the Organization of the Petroleum Exporting Countries (OPEC) so far, seems confortable with the glut and willing to bear it for the long haul.

In a recent report by Reuters, some OPEC member states, including Venezuela, “are clamoring for urgent production cuts to push global oil prices back up above US$ 100 a barrel.” Venezuela has called on OPEC of an emergency meeting this month, but the petition could fall on deaf ears.

The Saudi oil strategy is to cut price, rather than production, and this is generating fear of a potential price war among OPEC member states, and which would impact adversely the economies of sanctions-hit Iran and Russia, as well as Colombia’s largest regional trading partner: Venezuela.

If the price of oil has fallen 24 percent from its June high of US$ 110 for Brent, then oil-producing nations have been put on alert with their oil-based revenues ready to take a direct hit. Oil-sensitive nations such as Venezuela could be crippled by the aggressive stance of the Saudis to abandon the cartel’s pricing and go it alone. According to recent reports, Saudi Arabia, is prepared to sell oil as low as US$ 80 for two years in order to curb competition from U.S. “frackers.”

As one of Colombia’s largest trading partners, Venezuela would face more budget cuts compounded with runaway inflation. Venezuela’s troubles already are many: from internal dissent to dire economic mismanagement. A long slump in the oil price could turn it into the economic basket case of the Americas.

Colombia is hardly immune to the Saudi oil offensive and the U.S.’s quest for the more shale-based fuel. Crude accounts for more than half of Colombia’s exports and with production down to 981,000 barrels a day – the lowest in five years – President Juan Manuel Santos will need extra cash to keep the economic engine going. To stay competitive, the central bank, Banco de República, has let the peso drop closing in recent weeks near COL$2,050 pesos per U.S. dollar. The trend for a weaker peso (at an exchange rate close to $2,000) is predicted to last until the end the year and the Central Bank plans to keep the prime lending rate of 4,5 percent unchanged, as well.

Colombia’s cautious approach to economic management, as well as having a diversified and rich resource base may hedge it against falling oil futures. What Santos will need in the months to come, however, is more direct foreign investment, as well as cash reserves to finance urgent large-scale infrastructure.

But above all, the prospect for a lasting peace with the oldest guerrilla group in the hemisphere is going to dig deep into the state’s coffers. When the Revolutionary Armed Forces of Colombia (FARC) sat down two years ago in Oslo to begin lengthy discussions over peace and how to reach it, the domestic economic conditions, were different. Oil prices were rising steadily, and exploration across the nation was yielding results. Today, the discovery of oil deposits are few and multinationals are placing more attention on heavy oil recovery in existing wells, than opening new ones.

If oil is proving to be both fickle and elusive in Colombia, then the government could find itself in a bind bankrolling the peace with FARC. At a juncture in the five-point peace agenda, no definite price tag has been announced, leaving many in this country to question not only what has been negotiated, but for “how much?”

Colombia’s annual military expenditure averages 3.3 percent of its GDP, and which translated in 2013 to US$ 10.5 billion. One of the biggest spenders in the region on its military, the ongoing conflict has also impacted the flow of oil through its pipelines, with attacks by both FARC and the smaller Marxist National Liberation Army (ELN) in recent months. Senator Roy Barreras, president of the National Congress, revealed that Colombia would have to invest at least 90 trillion pesos or US$ 45 billion, to implement its peace with FARC.

If ending the 50 year-old conflict will cost a total of four years of the annual military budget, then Colombians can consider themselves well served. While the world braces itself for a financial “crash” over oil, there will be no respite at the gas station nor next year with taxes, as the national government is pushing through a tax reform to drum up cash reserves, while at the same time clamping down on evasion. A recent diplomatic dispute with Panama over Colombian companies registered in Panama due to its “tax haven” status, shows how determined the government of Santos is in bringing home the cash, and at a critical moment for oil producing nations.

LEAVE A REPLY

Please enter your comment!
Please enter your name here