Witte-Lebhar, Benjamin

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University of New MexicoUNM Digital RepositoryNotiSur Latin America Digital Beat (LADB)3-20-2015Price Slide Spells Difficult Days for SouthAmerican Oil ProducersBenjamin Witte-LebharFollow this and additional works at: https://digitalrepository.unm.edu/notisurThis Article is brought to you for free and open access by the Latin America Digital Beat (LADB) at UNM Digital Repository. It has been accepted forinclusion in NotiSur by an authorized administrator of UNM Digital Repository. For more information, please contact amywinter@unm.edu.Recommended CitationWitte-Lebhar, Benjamin. "Price Slide Spells Difficult Days for South American Oil Producers." (2015).https://digitalrepository.unm.edu/notisur/14317LADB Article Id:  79600ISSN:  1060-4189©2011  The University of New Mexico,Latin American & Iberian InstituteAll rights reserved. Page 1 of 3Price Slide Spells Difficult Days for South American OilProducersby Benjamin Witte-LebharCategory/Department:  RegionPublished:  2015-03-20Plummeting oil prices are causing no shortage of problems for South America’s top petroleumproducing countries, a list that is headed by Venezuela, home to the world’s largest proven crudereserves, but also includes Colombia, Ecuador, and Brazil.In the past nine months, the price of crude oil has fallen approximately 56%, from nearly US$115per barrel in June 2014 to less than US$50 per barrel as of mid-March. The drop-off is all the morenoteworthy given that it follows a relatively stable four-year run when prices hovered around the US$100 per barrel mark. Prices were higher still in 2008, peaking at a record US$145 per barrel beforetemporarily bottoming out as a result of the 2008-2009 global financial crisis.Steep oil prices may have been a burden for consumers, but they were a boon for countries likeColombia, which took advantage of a concurrent production increase to rake in billions of dollars.Colombian oil output nearly doubled between 2007-2014, from 550,000 barrels per day to 1 millionbpd, according to the US Energy Information Administration (EIA).Communities like Puerto Gaitán, in the central department of Meta, prospered. The town’spopulation tripled, reaching approximately 45,000. The local government, flush with royalty moneyfrom the nearby Rubiales oil field, Colombia’s largest, built schools, a large library, and a gaudyfour-story arch—erected in 2008 at a cost of approximately US$1 million—called the Puerta alParaiso (door to paradise). Puerto Gaitán even hosted performances by pop music idols MarcAnthony, a world famous salsa singer, and Daddy Yankee, a Puerto Rican reggaeton star.Now, though, the boomtown looks to be going bust. "The economy is devastated and everyoneis depressed and looking to leave," Lady Rubio, a local bar owner who claims she’s gone fromselling 300 beers a day to 60, told the Associated Press (AP) in late February. Local union officialstold the news agency that 7,000 Rubiales oil-field workers were laid off in just the past few weeks.Nationwide, some 25,000 oil workers—one-quarter of the industry’s work force—risk losing theirjobs, according to the Ministerio de Trabajo.Layoffs are only part of the problem. The sudden price plunge also creates a spending conundrumfor the government, which receives approximately 15% of its fiscal revenue from the oil industry; hascontributed to a currency devaluation (so far this year the Colombian peso has lost 8.5% of its valueagainst the US dollar); and caused stock prices in Ecopetrol, Colombia’s publicly traded national oilcompany, to tank. Given that oil represents half of all export earnings, the low prices are also likelyto eat away at the country’s overall economic growth rate, which stood at 4.8% last year, according tothe UN Economic Commission for Latin America and the Caribbean (ECLAC)."Colombia is already running a current account deficit," David Rees, an emerging markets analyst,told the British financial magazine Money Week last October. "The loss of export revenues meansthat imports may need to contract in order to prevent the deficit from widening further. This, inturn, points to a period of weaker economic growth."LADB Article Id:  79600ISSN:  1060-4189©2011  The University of New Mexico,Latin American & Iberian InstituteAll rights reserved. Page 2 of 3Whirlwind of difficultiesThe price collapse has been even more damaging for neighboring Venezuela, South America’slargest oil producer (approximately 2.5 million bpd) as well as its most-petroleum-dependentcountry. More than 90% of Venezuela’s export earnings come from oil, which also provides half thecountry’s fiscal revenue. Analysts are now wondering if the country is heading toward a default onits growing debts, which are harder to service now that its only real commodity has lost more thanhalf its value.President Nicolás Maduro tried unsuccessfully in late November to petition his partners in theOrganization of the Petroleum Exporting Countries (OPEC) to cut oil supplies as a way to pushprices back up. Saudi Arabia, the cartel’s leading member, rejected the plea, presumably because,by keeping prices low, it hopes to squeeze US producers of shale oil, a nonconventional petroleumsource. The US shale industry has made tremendous gains in recent years, trimming the country’sdependence on foreign petroleum and boosting the global oil supply. The technique, however,involves high overhead costs compared to the kind of standard onshore drilling prevalent in SaudiArabia and elsewhere in the Middle East.The current situation has compounded problems, both economic and political, that had beenhounding the government of President Maduro even before the price slide. Soaring inflation (above60% last year), high crimes rates, a perplexing three-tiered currency-exchange system, and supplyshortages of basic foodstuffs are fueling growing frustration with the country’s leadership (NotiSur,Feb. 21, 2014), which is also under increasing international pressure because of its decision to jailprominent opposition figures.On March 9, the US government took the dramatic step of freezing the assets of seven Venezuelanofficials it accuses of human rights abuses. US President Barack Obama justified the decision bysaying the situation in Venezuela poses an "unusual and extraordinary threat" to US nationalsecurity and foreign policy. A number of Latin American leaders were quick to challenge Obama’sclaim. Ecuadoran President Rafael Correa called it a "joke in bad taste," while Uruguay's formerPresident José Mujica, who left office March 1, dismissed the US president’s comments as"madness."Rolling with the punchesSouth America’s other OPEC member, Ecuador, is struggling with the low oil prices as well butappears to be in a far better position than Venezuela to weather the storm. Ecuador produces onlyabout half as much oil as Colombia. Like its northern neighbor, however, it posted solid growthnumbers last year (4%) and thus enjoys something of an economic cushion. Venezuela’s economy, incontrast, contracted in 2014 by 3%, ECLAC reported.President Correa is also on far more solid political ground compared with his Venezuelancounterpart. Correa, a trained economist, has an approval rating of more than 70% despite beingin office for eight years already, an impressive tenure considering that the country’s four previouspresidents served just over eight years among them. Support for Maduro currently stands atapproximately 22%, according to a survey by the polling firm Datanálisis.Correa has also earned positive reviews from some economic analysts, who praise his government’s"pragmatic" efforts to anticipate the effects of the petroleum price slump. A recent report by LatAmLADB Article Id:  79600ISSN:  1060-4189©2011  The University of New Mexico,Latin American & Iberian InstituteAll rights reserved. Page 3 of 3Confidential, a Financial Times research service, noted that, in January, Ecuador trimmed its oil-dependent budget (approximately one-quarter of the country’s fiscal revenue comes from the oilindustry) by 4%. The Correa administration also secured a US$7.5 billion loan from China to helpoffset its spending deficit and proposed a tax reform that could boost the country’s coffers by someUS$200 million annually. The government even made a pitch for more tourism dollars by runninga pricey television spot during last month’s Super Bowl. The ad reportedly cost the government US$3.8 million."The fund managers we spoke to raised the progress made by Ecuador, contrasting thegovernment’s pragmatic and timely actions with the relative inertia in Venezuela," LatAmConfidential reported. "The government has other levers on which it may pull. It could make use offunds held by the social security while further sovereign issuance is also possible.""Things that could have been"The deep oil slump is also complicating matters for Brazil, particularly since it coincides withan unfolding scandal involving the partially state-owned oil giant Petrobras, which has lostapproximately US$50 billion of its value because of falling stock prices.Brazil is South America’s largest economy and second-leading oil producer with daily output ofapproximately 2 million bpd (plus another 500,000 bpd of biofuel). But it also has an economy that isrelatively diverse compared with Venezuela, Colombia, and Ecuador. The lion’s share of Brazilianoil, furthermore, is sold domestically—at subsidized prices. In that sense the price drop is lesstroublesome than it is elsewhere in South America because the state can actually save revenue byscaling back its oil subsidies.Still, the situation is hardly good news for a country that had been setting its sights on being oneof the world’s top-five oil producers by 2020 but is now sliding toward recession (NotiSur, Feb. 20,2015). Brazil had been pinning its hopes on oil reserves discovered in 2007 off the coat of Rio deJaneiro (NotiSur, Nov. 30, 2007). The "pré-sal" (below the salt) reserves, so named because they lieunder several thousand meters of encrusted salt, are enormous. But they’re also difficult to accessand, given the huge overhead costs involved, make far less economic sense when oil is at US$50 perbarrel versus US$100 per barrel.Even if pré-sal exploration and operation were more cost effective, it is not clear right now howmuch success scandal-plagued Petrobras, which has a virtual monopoly on all things oil-related,would have attracting the capital it needs to really develop the offshore reserves.In a recent analysis published in Foreign Policy magazine, Christopher Sabatini, the senior policydirector with the Americas Society and Council of the Americas (AS/COA), says the Petrobrasscandal uncovered "an unholy knot of corruption kickbacks" that is scaring off investors. "Brazil’seconomy is expected to contract by 0.1% this year, and broiling political turmoil has tainted thegoverning party, plunging President Dilma Rousseff’s popularity to less than 20%," he adds. "Theonce-promising oil industry increasingly appears to be a symbol of Brazil’s endemic corruption anda reminder of things that could have been."-- End --

Price Slide Spells Difficult Days for South American Oil Producers

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Price Slide Spells Difficult Days for South American Oil Producers

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