Higher Oil Prices Boost Latin America

August 7, 2018

It’s no coincidence that Latin America’s ‘golden decade’ coincided with booming commodities. When raw material prices started to fall, so too did the region’s economic growth. In 2010, at the height of the commodity boom, the average yearly GDP expansion across Latin America was 6%. By 2015, when commodity markets were in the doldrums, that had become a contraction of -0.6%.

Oil-rich Latin America

Oil was the last of the major commodities to enter a bear market, but in late 2014 it began a losing streak that saw it fall from more than $100 a barrel to less than $30 by mid 2015. Latin America is home to 20% of the world’s oil reserves and a major exporter, so the freefall hit producer countries hard. It was the final straw for the Venezuelan economy, as it meant that profits from the oil surplus could no longer paper over the government’s horrendous mismanagement and theft. On the other side of the political spectrum it created headaches for the Mexican government’s attempts to attract international investment to the oil sector. But now, with oil prices north of $70, things are looking up for Latin America’s producers.

Winners and losers

In Venezuela higher prices may give the government some room to negotiate an import crisis that already prevents the state from performing basic functions. Although any respite from prices will be undermined by falling production. In Mexico the higher prices could help ensure continued international interest in its oil auctions in the face of a president elect that campaigned against the reform. In Ecuador the oil boom should help new president, Lenin Moreno, in his battle to reduce the country’s fiscal deficit. Although the shadow of former president Correa still looms large on the country. He tied about half of Ecuador’s production until 2024 into unfavourable fixed price deals with Chinese buyers, which means the Andean country won’t see all of the benefits of the recent rises. But for Ivan Duque, the new president of its northern neighbour, Colombia, the oil boom is perfectly timed. It will allow him to close the small fiscal deficit, without inflicting pain on voters. Duque is benefiting from the prudent macroeconomic management that saw Colombia ride out oil’s bear market relatively unscathed.

For Ivan Duque, the new president of Colombia, the oil boom is perfectly timed…

But not everyone in Latin America is welcoming the boom. As UK-based consultancy Capital Economics points out, net importers such as Chile stand to lose out. Capital Economics’ Latin American specialist, Quinn Markwith, estimates oil at $76 would increase Chilean inflation by 0.4%, which eventually would hit consumer spending. Meanwhile higher prices could increase political tensions in places like Argentina and Mexico, where prices at the pump are a volatile issue.