Oil price decline mostly bad for Latin America
Walter Molano, GUEST COLUMNIST
The recent decline in oil prices is partially the product of rising US output.
In August, oil imports from OPEC dropped to a 30-year low. It is also the result of increasing production in Libya and Russia.
Russia is in a mad dash to generate alternate sources of hard currency, as the international sanctions take hold. However, the Saudi price cut was the main catalyst that pushed the market lower. Although they deny it, the Saudi move was probably engineered to damage the burgeoning shale sector.
Given the recent plunge in prices, producers will no longer assume that the market can only move higher. Nevertheless, the downward trend has important ramifications for Latin America. Not all of them are bad.
Up until the 1980s, Venezuela and Mexico were the only major oil producers in the region. Most of the countries produced some oil, but the sectors were dominated by large and inefficient state-owned companies. During the liberalisation reforms of the 1990s, most of the countries increased their output.
Today, the region's daily production is more than 10 million barrels per day. It is an important part of economic activity, trade and government revenues.
Mexico and Venezuela are at the top of the list, with daily output of about 2.8 million barrels, each. Brazil is third, with a daily production of 2.2 million barrels and Colombia is fourth with almost a million barrels.
Ecuador and Argentina each produce about 600,000 barrels per day. Trinidad & Tobago produces 82,000 and Peru's daily output is 68,000.
Chile brings up the rear with only 7,000 barrels per day.
Although the region's output is high, not all of it is slated for the international market. Brazil, for example, has to import oil to meet its internal needs. Moreover, refining capacity is limited.
When we balance oil exports with imports, we arrive at a net oil balance. Sadly, the region exports only about a quarter of its total daily production.
Not surprisingly, Venezuela is at the top of the league table, with daily net exports of 1.7 million barrels. Mexico is next, sending 850,000 barrels abroad. Colombia is third, with a daily embarkation rate of 650,000 barrels. It is followed by Ecuador, with exports of 256,000 barrels per day and Trinidad which sends out 75,000 barrels per day.
All of the other countries are net importers. This means that the decline in oil prices will actually help their balance of payments.
Nevertheless, the countries most affected by the recent rout will be Venezuela and Trinidad, which will suffer deterioration of more than three per cent of GDP in their current account balances.
Colombia and Mexico will see an erosion of 1.2 per cent and 1.5 per cent of GDP, respectively.
At the same time, Brazil and Chile will see more than 0.5 per cent of GDP improvement in their current account balances, while Peru and Argentina will enjoy a marginal improvement of about 0.15 per cent of GDP.
Overall, the recent price decline will shave about US$30 billion off the region's current account.
The impact on the fiscal side will be more important. Oil royalties represent more than a third of Mexico, Venezuela, and Trinidad governments' revenues.
Trinidad had a pretty sensible budgeting programme that slated excess oil revenues to a stabilisation fund, but the other two are much more exposed to current prices. This will force them to impose important spending cuts.
Venezuela is already talking about slashing its PetroCaribe budget and raising gasolene prices. At the same time, the Mexican government is increasing its fiscal deficit projection to 3.5 per cent of GDP and planning to tap the international capital markets for more than US$6 billion next year.
Ecuador's government relies slightly less on oil, but it is still very dependent. The fiscal deficit is expected to soar above five per cent of GDP in 2015, and it could crest over seven per cent of GDP if the situation worsens.
Most governments can meet these shortfalls by printing money, but Ecuador is dollarised. Therefore, it does not have this option.
Oil royalties represent five per cent of Colombia's budget, but the government is moving fast to increase corporate taxes to offset the projected 1.6 per cent of GDP decline in revenues.
Interestingly, the impact on inflation will be mixed. Gasolene prices are heavily regulated in the region. Brazil and Chile are raising prices at the pump. Venezuela will most likely do the same. The rest of the countries are moving pump prices lower, but at a slow pace. Therefore, the impact on inflation will not be as dramatic as in other parts of the world.
In conclusion, the slump in oil prices will trigger a deterioration of the region's balance of payments, which should lead to weaker exchange rates. It will also produce difficulties on the fiscal front, which should lead to higher taxes.
The price decline will add to the woes that the region is already suffering.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC. firstname.lastname@example.org