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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Colombia Struggles To Overcome Its Oil Curse

Colombia’s oil history began in 1918 and entered a golden age in the late 1980s. Then, earlier this century, a new petroleum boom started, which was to bring considerable wealth and form the foundation of the country’s economic growth. While Colombia has experienced significant economic development over the last two decades, with annual GDP growth peaking at 7.4% in 2011, there are signs that the resource curse is weighing heavily on its future. The term ‘resource curse’ is used to describe the well-documented phenomenon of bountiful natural resources sharply impacting a country’s governance, stunting its economic diversity, breeding corruption, and fueling conflict. Michael L. Ross from the University of California identified that oil wealth can be poisonous to a country’s development and governance. It not only reinforces the power of authoritarian regimes but also magnifies corruption because of the massive income generated and triggers or sustains conflicts in low to middle-income countries. These are all issues that are coming to a head in Colombia. Despite the landmark 2016 peace deal with the Andean country’s largest Marxist guerilla group, the FARC, violence and civil disturbances have grown over the last year. The capital Bogota was engulfed in riots last month after police allegedly murdered a law student who had been drinking in the street in violation of coronavirus social distancing rules. There has been a sharp spike in the number of murders with 46 massacres, the murder of three of more people in a single act, occurring since the start of the year. Since the start of 2020 more than 100 community leaders, environmentalists, and other activists have been murdered in Colombia. The escalation of violence has been amplified by Colombia’s coronavirus lockdown which began on 25 March 2020, severely limiting the movement of people.

This comes on the back of nationwide protests against President Duque’s administration toward the end of 2019. Attacks on oil infrastructure, notably pipelines, continue unabated. In a worrying development, armed men assaulted national oil company Ecopetrol’s La Cira-Infantas oil field in June, taking 31 wells offline. Since the commencement of peace negotiations with the FARC in 2012 armed attacks on well-heads have been relatively rare. These are disturbing developments for a country that has been wracked with violence and armed conflict since the assassination of leading politician and presidential hopeful Jorge Gaitan in April 1948. That sparked the violent clashes in the capital known as the Bogotoza that eventually morphed into the countrywide civil war, La Violencia, which lasted until 1958 and was the foundation of the internal strife which has existed ever since. Related: Libya’s Oil Production Jumps To 300,000 Bpd As Exports Rise


Clearly, a deteriorating security situation poses a direct threat to Colombia’s economically vital petroleum industry, which has been struggling to attract investment because of the oil price collapse this year. A combination of the price collapse and coronavirus has seen oil production in the country declining since February 2020. By July 2020, combined oil and natural gas production had fallen a worrying 17% compared to the start of 2020. There are signs it could be disrupted further by the uptick in violence, particularly in rural areas where coca is grown and trafficking routes intersect. While the national government is focused on bolstering security for the economically vital petroleum industry in an environment where it is deteriorating, this will do little to alleviate the long-term impacts associated with being economically dependent on oil. Despite petroleum being responsible for generating only 3.5% of Colombia’s second quarter 2020 gross domestic product, it was Colombia’s largest export, making up 28% of all exports by value for the first seven months of 2020. Prior to the late-2014 oil price crash, those numbers were even higher. According to data from government statistics agency DANE during 2013, at the peak of the last global oil boom, petroleum was responsible for 4.5% of Colombia’s GDP and 54% of all export earnings.

It is oil’s prolonged price slump which is responsible for ever mounting budget deficits, a sharply weaker peso and tepid economic growth. During 2013, at the peak of the last oil boom when the international Brent price benchmark averaged over $108 a barrel for the year, Colombia’s GDP expanded by an impressive 5.1%. It then fell to a multiyear low of 1.4% in 2017 as oil prices slumped and Brent averaged $54 a barrel and then rebounded to 3.3% on the back of stronger domestic consumption during 2019. Prior to the oil price slump, the central government reported a 2013 budget deficit of just over 2% which widened to 3.6% for 2017 and fell to 2.7% during 2019 as oil prices firmed.

Related: Oil Majors Hit Hard By Canada's Energy Stock Selloff

The overreliance on petroleum has a significant cost for Colombia’s economy and development. The government’s dependence on oil rents, which in 2013 were responsible for around a fifth of government earnings, means policy is focused on promoting the development of petroleum to the detriment to other economic sectors. Colombia’s limited proved oil reserves, which according to the Ministry of Mines and Energy were a paltry 2 billion barrels with a six-year production life at the end of 2019, pose a significant risk to the country’s economic development. President Duque announced in 2018 that Colombia needed to double its oil reserves. He intends to do this by attracting further offshore investment in Colombia’s energy patch and opening-up the Andean country to shale oil exploration and production.

That, however, has been delayed by the global pandemic and latest oil price crash which has seen oil companies slash spending and shutter uneconomic and non-essential operations. Colombia’s ability to attract the required investment from foreign energy companies is hampered by high breakeven prices, estimated to be $40 to $55 per barrel, making new projects unprofitable at the current Brent price. The Andean country’s attractiveness as a destination for international investment in petroleum is being further damaged by rising insecurity and violence. For as long as risks remain high and oil prices are low, international energy companies will look to more secure lower cost jurisdictions in which to invest.

These issues are being amplified by the COVID-19 pandemic. That, along with the national quarantine and sharply weaker oil prices were responsible for Colombia’s economy contracting by an alarming 15.7%, or more than double the IMF’s 2020 forecast of negative 7.8%, during the second quarter 2020. This makes it highly unlikely that Colombia can attract the required investment and expertise to expand its proved oil reserves to a sustainable level and boost production. Until the central government implements policies aimed at reducing Colombia’s dependence on petroleum, the country will remain caught in the extractive trap and vulnerable to oil’s boom and bust cycle. This along with a lack of access to capital and technology transfers, which typically come with foreign investment in manufacturing, will prevent Colombia from developing while reducing poverty, corruption, and conflict.

By Matthew Smith for Oilprice.com 

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  • George Doolittle on October 07 2020 said:
    I always thought of Venezuela as the "great oil powerhouse that is no more."

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