Friday, November 7, 2014

Colombia's Oil Crisis

Just a few weeks ago, when Bogotá announced the astronomical cost of its planned subway, experts said the city couldn't pay for it without cutting back on other major projects or lots of money from the national government.

Since then, the nation's financial prospects have gone south.

While Colombia is not often thot of as an oil exporter, it is. In October, in fact, Colombian petroleum production averaged 1 million barrels per day - almost one-third the production of neighbor Venezuela and more than double the production of Ecuador, both OPEC members.

As a result, the global drop in oil and gasoline prices which has drivers celebrating is bad news for the environment, urban liveability - and for Bogotá's prospects for building a subway.

To be clear, Bogotá's subway plan is exactly the worst possible way to build mass transit. Burying its train system undergound will mean slower construction and higher cost. Bogotá would get much more transit for its money by building either a surface level or an elevated train track, while meanwhile expanding the TransMilenio system and creating more bus-only lanes.

But city leaders appear fixated on the most expensive, underground alternative - which makes one wonder whether some hidden agenda's at work.

However, swooning world oil prices could make the subway, which would require central government financing, an impossibility.

Colombia is not a major world oil producer, but it nevertheless gets between 40% and 50% of its export revenue comes from oil (and more from gas and coal), far more than Colombia's iconic export, coffee. Ecopetrol, the state oil company, has long been a national cash cow.

The global oil price decline, which is likely to last for reasons detailed below, means a several-point drop in Colombia's GDP, For reasons detailed below, oil prices are likely to stay low for a good while, forcing Colombia to either find new sources of income, or cut its budget.

Less revenue will mean less money for schools, police, parks, health care and big infrastructure projects such as Bogotá's planned metro. And there's little Colombia can do about it. If Colombia attempts to export more oil, as other petroleum producers are doing, it will only push world prices down further.

What Colombia could do is diversify its economy, and replace raw materials with manufactured goods, which put lots more money into workers' hands and are less subject to price fluctuations. I am perpetually amazed that Colombia, with its cheap labor and resources, still imports things like clothing from China.

Unlike previous oil price drops, this one shows no sign of reversing anytime soon. China's economic growth is slowing and Europe seems stuck in recession. Meanwhile, Iraq and Libya are returning to oil production, and the planet's swing producer, Saudi Arabia, gives no sign of closing the tap. The Saudis are probably using oil as a weapon, since their arch-enemy Iran's oil is more expensive to pump out of the ground and refine. Lower world prices will also make marginal wells in places like Canada unprofitable, reducing production in the long run. (And Venezuela will get hit even harder.)

Venezuelan Pres. Nicolas Maduro rants against "savage" fracking techniques, because they threaten his nation's insane, populist spending, including giving away free gasoline. I wonder whether he means 'savage' in contrast to gentle, civilized traditional oil production methods involving deforesting rainforest, setting off explosives underground, drilling holes deep into the earth and then burning that petroleum in the atmosphere?

At the same time that Middle Eastern countries are racing to pump their oil, the U.S. is moving whole hog into fracking, creating an production boom there. The fracking boom looks only likely to expand to places like England and Colombia, and inevitably China and Russia. That may mean 'Game Over' for Planet Earth's climate, but before that happens it'll devastate lots of oil producers' budgets, and put lots of infrastructure projects on hold

To escape this trap, Colombia needs to diversify its economy from raw materials.

By Mike Ceaser, of Bogotá Bike Tours

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