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In mid-January 2016, oil flirted with prices in the upper US $20s before settling in the low US $30s, the latest blow in a decline that has wiped out nearly 20 percent of the commodi- ty’s value in 2016 alone. Industry analysts, at a loss to predict where prices will go next, cite an ongoing increase in global production matched with softening demand as confounding factors in projecting prices. Some experts say oil will bottom out at US $10 a barrel; others see a rebound throughout the year, with prices hitting US $70. Meanwhile, oil-producing countries and consumers in Latin America react in opposite directions as revenues go bust and personal spending increases.
NET EXPORTERS SUFFERING
What negative impact there will be from declining oil prices will generally be felt by countries that are net exporters of oil. To the extent to which their GDPs depend on oil revenues, these countries can expect slower growth and weaker external current account balances, as well as additional fiscal pressures as producers and governments alike scramble to make up for lost revenues. Especially since the region is dominated by state- owned oil companies, income taxes, dividends, and royalties to the government are being negatively affected.
Where these companies hold domestic monopolies on the sale of gasoline and related products, they may also bear the cost of fuel subsidies.
Particularly hard hit is OPEC member Venezuela, which de- pends on oil revenues for about 45 percent of its income and 95 percent of its exports. Bolivia has also lost significant revenue from natural gas exports, although the Bolivian government has worked hard to build up substantial reserves to buffer losses. Other net oil exporters in Latin America are Mexico and Colombia, which are expected to weather the storm reasonably well, and Ecuador—also an OPEC member—and Trinidad and
Hurting or Helping? Declining Oil Prices in Latin America
As crude oil prices have dropped into the mid- US $30s, energy producers and policymakers dependent on oil revenue in Latin America and the Caribbean have had to reconsider strategy. Consumers, on the other hand, have benefited, with more spending money in their pockets.
Tobago, which are curbing public spending in reaction to the decline.
Both Ecuador and Venezuela pleaded with other OPEC mem- bers to cut production at a cartel meeting in late November, to no avail. The crisis is rapidly destabilizing the government of Nicolás Maduro, president of Venezuela, who faces a significant challenge from the opposition-controlled National Assembly. Ecuador’s president, Rafael Correa, on the other hand, presides over a much stronger and more stable economy and does not seem to be in imminent danger of losing power.
IMPORTERS, CONSUMERS BENEFIT
Conversely, countries that are net importers of oil—a group that includes all of Central America and the Caribbean (CAC), except for Trinidad and Tobago—will generally benefit from the steep decline in its price; this benefit will take the form of faster growth, stronger external positions, and reduced inflation.
Net importers’ fiscal balances will be affected by reduced oil prices, but in some cases in offsetting ways. For instance, tax revenues from oil imports will likely decline, but fuel subsidies may decline as well. IMF analysts suggest a moderate strength- ening of most importers’ fiscal positions due to declining oil prices. Other factors affecting oil imports are an increasing reliance on more efficient energy strategies, including a greater emphasis on renewable energy and the use of public transpor- tation.
THE PETROCARIBE PARADOX
Skewing expectations is Petrocaribe, the 2005 oil alliance that permits member nations to purchase oil from Venezuela at very preferential payment terms. In 2014, fully 2.5 percent of the CAC region’s GDP was attributable to Venezuelan financing
of oil purchases; if Venezuela, hard-hit by the price drop, must cut back its finances, it will have to do the same with respect to its support of the alliance. Net importers Nicaragua and Haiti, which each receive financing from Venezuela equal to more than 4 percent of GDP, are most vulnerable, and paradoxically may share the fate of net exporters due to their GDP’s reliance on
oil revenue. Many other countries, especially the smaller ones that need less financing for their oil purchases, are projected to achieve GDP growth of around 3.25 percent.
18 STRATEGY