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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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How Volatile Oil Prices Could Spark Conflict In South America

Fears of another coronavirus outbreak, lockdowns, and the emergence of the Omicron variant in South Africa has caused the price of crude oil to plunge. Since then, prices have been extremely choppy as conflicting news emerges regarding OPEC’s plans to grow petroleum production and how the progress of the global economic recovery weighs on energy markets. There is also the threat posed by the U.S., South Korea, China, and India contemplating their strategic oil reserves to combat higher crude oil prices which are responsible for an unanticipated sharp spike in inflation that is threatening their economic rebounds. While the international benchmark Brent price is up by 49% since the start of 2021 it has lost more than 12% since its late October peak. This sharp decline along with choppy prices and an uncertain outlook has had a marked impact on the performance of emerging market currencies which are tied to the price of crude oil. Among the hardest hit is the Colombian peso, which has slumped by 12% since the start of 2021 and lost 4% alone since oil prices peaked in late October. 

If the international Brent price remains weak for a sustained period it will have a significant impact on Colombia’s economic recovery. This is because crude oil is responsible for around a third of exports by value, 3% of gross domestic product and nearly a fifth of government revenue. Bogota is already running a large budget deficit as it attempts to stimulate an economy which was battered by the pandemic during 2020 with gross domestic product shrinking 7% year over year and reduce a sharp spike in poverty. The Colombian peso’s sharp decline in the value is fueling inflation in the Andean country which has the potential to trigger further economic fallout in a country where unemployment and poverty remain stubbornly high. By December 2021 inflation, as represented by El índice de precios al consumidor (IPC – Spanish initials) or the consumer price index had spiked to its highest level since 2016, spiking to 5.26%.

Source: DANE (Colombian Government Statistics Agency).

Inflationary pressures because of a sharply weaker peso are magnifying existing economic and social fissures that exist in Colombia, placing greater pressure on the economy and standard of living for ordinary Colombians. Higher inflation is causing prices for consumer staples to soar in a country where the minimum wage of around $233 per month does not cover the cost of living for households. Rapidly rising poverty, which is responsible for surging rates of crime and civil unrest, has become a grave issue for Colombia which at the end of 2020 had 42.5% of its population living below the poverty line compared to only 35% two years earlier.

Source: DANE (Colombian Government Statistics Agency).

Rapidly rising poverty is fueling social discontent and civil unrest causing the security environment to deteriorate and violence to rise, particularly in the regions where there is a minimal government presence which has become hotspots for cocaine production. Many of those rural zones, which are heavily infiltrated by illegal non-state armed groups are where Colombia’s petroleum reserves and most productive oilfields are located. Those developments along with the higher costs caused by a weaker peso and surging inflation are weighing on petroleum operations and Bogota’s plans to reactive the economically crucial industry impacting GDP growth and exports.

Related: JP Morgan Predicts The End Of Covid, A Strong Economy, And $125 Oil

There is evidence that Colombia’s hydrocarbon sector is struggling to return to pre-pandemic production. According to Ministry of Mines and Energy data (Spanish) the Andean country only pumped 740,265 barrels per day during November 2021, which is a disappointing 0.5% less than a month earlier and a worrying 1.5% lower than a year earlier.

Source: Colombia Ministry of Mines and Energy, U.S. EIA.

This decline in oil production occurred despite the volume of operation rigs drilling for crude oil expanding during October and November 2021. At the end of October there were 23 active rigs, two more than a month earlier and in November 26 rigs were operational.

Source: Baker Hughes International Rig Count.

Despite the ongoing decline in oil output which is attributable to heightened security risk and civil unrest, sparked by a clumsy April 2021 attempt at tax reform by President Ivan Duque, natural gas production is growing. For October 2021, Colombia pumped 1.127 million cubic feet of natural gas per day which was 4% higher month over month and 3% greater than for the same period in 2020.

Source: Colombia Ministry of Mines and Energy, World Bank, U.S. EIA.

Natural gas production growth is a positive development for Colombia which by 2018 was facing a looming energy crisis because of a growing shortage of the clean fossil fuel. That forced Bogota to start natural gas imports because of shortages caused by constrained supplies and rising domestic dependence on natural gas. As part of the government’s strategy to attract significantly greater investment in natural gas exploration and production, it established a system where well-head natural gas prices in Colombia were significantly greater than the U.S. Henry Hub Spot Price.

Colombia’s inability to lift petroleum liquids production is particularly concerning because of the economic and social impacts associated with the failure to reactivate the strife-torn country’s oil industry. Despite the pandemic easing significantly in the Andean country with the case count dropping from a June 2021 high and lockdowns being removed crude oil output has yet to return to pre-pandemic levels. For October 2021 production declined both month over month and year over year to average 740,265 barrels per day. This was also a worrying 16% lower than the 882,677 barrels pumped per day for that month during 2019. For the first 10 months of 2021, Colombia’s petroleum output only averaged 734,231 barrels per day which is significantly less than the daily average of 781,300 pumped during 2020 and a worrying 17% lower than the 885,863 produced for 2019. This marked deterioration in production is occurring despite 2021 minimum anticipated oil industry investment expanding by 52% year over year to $3.1 billion.

These latest developments point to the existence of deeper issues that are preventing the successful reactivation of Colombia’s economically crucial oil industry to a pre-pandemic operational tempo. Sporadic community blockades, mainly in the Putumayo Basin, are impacting industry operations causing crude oil output to fall, while the risk of more nationwide anti-government protests remains because of heightened political tensions. A sharply weaker peso which will drive a marked increase in inflation will only magnify those headwinds, many of which are related to heightened security risk and ongoing civil unrest. This is fueling further social unrest rising crime rates and heightened insecurity in regional areas where the oil industry operates. Inflationary pressures and a significantly weaker peso will drive up operating costs for energy companies operating in Colombia. That will deter foreign investment in the Andean country’s onshore oil industry because of high breakeven prices, which are estimated to be around $45 per barrel, and considerable security risk.

By Matthew Smith for Oilprice.com

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  • George Doolittle on December 11 2021 said:
    Columbia is mainly about being a coal powerhouse not oil (which is new) and natural gas which is also new. Columbia is also about gold mining as well however and in fact "real gold" as the Battle over a long ago sunk Spanish galleon laden with billions in us dollars worth of gold rolls on going on decades now between Columbia, Ecuador, Spain, the Woods Hole Institute of Massachusetts and a private US Company which claimed the find back in the 1980s.

    Obviously however bad the oil situation might be in Columbia it is nothing compared to the utter devastation suffered by Venezuela over the past 20 plus Years now.

    Having said that the coal situation has hit Columbia somewhat hard but their reserves are of very high quality, dirt cheap and very economic to produce and sell globally.

    "Still not a mining powerhouse" like Canada or Australia absolutely...or Mexico...but in theory could be.

    Of course I also think of Columbia as a major coffee producer but apparently that has changed.

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