In June 2014, West Texas Intermediate, a benchmark crude oil grade, sold at $106 dollars per barrel. In early December, the price closed at $65 dollars per barrel, and is currently trading at just over $50 dollars per barrel. This precipitous decline has had an adverse effect on oil producers in Latin America—in particular, countries such as Mexico and Colombia that heavily rely on oil receipts to fund their national budgets.
On the other hand, consumers in Central America and the Caribbean are benefiting from low oil prices. Investors are looking at the region with a long-term view, and while some companies are cutting back on spending plans, the resources available in the region will continue to be attractive.
While formulating spending and investment plans for the year, energy companies will budget for a certain oil price in order to break even. For example, Venezuela’s break-even price in January 2015 was over $115 per barrel, making it extremely challenging to turn a profit. The drop in oil prices also impacts gas investment, because national and international oil companies often prospect the two at the same time—and thus must make appropriate spending decisions based on their relative prices. As such, the two markets are closely intertwined.
As investment levels are cut back, the oil price environment should be leveraged to encourage integration efforts in the region that would improve conditions for investment, even in a price-constrained environment. For example, the Pacific Alliance, which includes Chile, Colombia, Mexico, and Peru, should seek to create larger internal markets and stronger investment conditions to draw investment. Shale gas development is also priority for the Alliance, and the creation of a development bank to finance infrastructure projects is one recommendation for further development.
From a macro perspective, the IMF estimates that Latin America will come out mostly neutral, with no net boost from the decline in oil prices. Growth projections have decreased to 1.25 percent for the region, and Colombia, Ecuador and Venezuela will all experience a downturn in their growth rate. However, Argentina, Brazil and Mexico will all experience modest economic growth. The Caribbean basin countries—all energy importers except Trinidad and Tobago—are tied to the favorable financing regime of Petrocaribe, whose existence is in question due to declining economic conditions in Venezuela.
Countries that are net importers of energy should take advantage of this time to invest in renewable energy, since budgets might allow for this type of spending at the moment. Oil prices will likely increase in the next few years. Renewable energy developers are looking at the viability of solar and wind projects from a 20 to 30-year perspective. Therefore, renewable energy development implies a long-term horizon that overrides the current reality.
Still, despite the downturn in 2014 and early 2015, energy development will continue to prosper in Latin America due to the sector’s attractiveness and the region’s ample reserves. While oil prices may stay at depressed levels for the medium term, investment is a long-term value proposition. Steps taken now may very well be rewarded in the future.
