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Summary: The Price of Oil’s Impact on Latin America and the Caribbean 

Leandro Alves price of oil

Leandro Alves, Principal, Falvez Energy

February 20, 2015

Panelists:

  • Vladimir Werning, Executive Director and Head of Latin America Research, J.P. Morgan
  • Adrienne Cheasty, Deputy Director, Western Hemisphere Department, International Monetary Fund (IMF)
  • Leandro Alves, Principal, Falvez Energy
  • Eric Farnsworth, Vice President, Council of the Americas (moderator)

Summary

With crude prices hovering around $50 per barrel, Latin America and the Caribbean’s energy producers and consumers have had to reevaluate their plans for 2015. In particular, lower oil prices put pressure on producers’ budgets, while consumers benefit through lower spending on energy imports.

In the wake of this crisis, panelists offered a range of perspectives on the topic, agreeing on the causes but presented different opinions as to whether or not the crisis would have positive or negative effects on Latin America and the Caribbean. The discussion analyzed how increasing oil prices will affect various countries, and how they will handle the aftermath.



A paradigm shift is occurring in Latin America

Falvez Energy’s Leandro Alves emphasized that over the past ten years in Latin America there has been a “paradigm shift” away from the use of oil due to high prices towards power generation. “Liquid fuels used to be the cheapest source of electricity and energy in the world” said Alves. Since the dramatic price increase of 2005, countries had to develop alternative energy sources to combat the high cost of fossil fuels. Energy efficiency, renewable energy, and use of mass public transportation all drove the shift from liquid fuels to electricity, therefore making the shift away from oil much more permanent.

Overall picture for growth

Adrienne Cheasty of the IMF and Vladimir Werning of J.P. Morgan offered both positive and negative opinions on how the oil crisis will impact overall growth in the region. Cheasty stressed that the oil price decline will have positive impact on world as a whole, however, the IMF estimates that Latin America will come out mostly neutral, with no net boost from the decline in oil prices. Their growth projections have been decreased to 1.25 percent which is the same projection as last year, but almost 1 percent lower than previously expected for 2015. Cheasty cited the IMF’s estimate of a growth rate of negative 7 percent for Venezuela, negative 1 percent for Colombia, and that growth will be halved for Ecuador.

However, Cheasty also said there is a positive side to the oil shock. She does not predict that the oil shock will have a large impact on Brazil and Argentina, and Mexico is still expected to grow by 3 percent. Additionally, growth will be boosted by an increase in private sector disposable income. Not all of the price decline will be passed through to the private sector, but it is expected to receive a large share. Not all of the price decline will be passed through to the private sector, but it is expected to receive a large share. The IMF is expecting that, by 2016, 60 percent of countries will have full pass through, which will be a huge boost to oil producing countries now receiving oil at lower prices.​

Werning agreed that, overall, there will not be much of a growth increase in Latin America. Nevertheless, he also pointed out that the price decline will not devastate the entire region. Mexico’s fiscal resources shouldn’t be affected, because it is taking a cautionary approach as if this shock is permanent. As such, the country is already preparing to make a fiscal adjustment for next year, spreading out the burden of the adjustment to start early. Brazil has weathered the oil shock and will continue to focus on rebalancing their macro-economy.

How will the Caribbean be affected?

Cheasty stated that small states with large oil imports will gain the most, especially those in the Petrocaribe program. While the Caribbean is benefiting from the cuts in oil prices, it also puts them in jeopardy because they receive most of their oil from Venezuela. If Venezuela needs to cut back its finances it will also need to cut back support for Petrocaribe, therefore leaving the possibility of detrimental effects on small countries that are very exposed. On average in 2014, about 2.5 percent of Central America and the Caribbean’s GDP came from Venezuelan financing. Nicaragua and Haiti are the most vulnerable in the situation as they receive more than 4 percent of their GDP financing from Venezuela. Although Petrocaribe has been tightening its terms, small countries are generally better off because they need less financing for their oil bills. Projected improvement for Petrocaribe countries is a 3.25 percent growth in GDP in the upcoming year, demonstrating that not all effects from the oil shock are dramatically negative.