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Hurting or Helping? Declining Oil Prices in Latin America

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As crude oil prices continue to plummet in the face of a global oil glut, energy producers and policymakers dependent on oil revenue in Latin America have had to reconsider strategy. Consumers, on the other hand, have benefited, with more spending money in their pockets.

Oil spill

Published: January, 2015

 

 

 

 

 

In mid-January 2016, oil flirted with prices in the upper $20s before settling in the low $30s, the latest blow in a decline that has wiped out nearly 20 percent of the commodity’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 $10 a barrel; others see a rebound throughout the year, with prices hitting $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.

Despite the downturn, energy development will continue to prosper in Latin America due to the sector’s attractiveness and the region’s ample reserves.” —Christian Gómez, Director of Energy, Council of the Americas  

Particularly hard hit is OPEC member Venezuela, which depends 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 Tobago, which are curbing public spending in reaction to the decline.

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