How will Colombia weather 2015's oil crash

How Colombia deals with the collapse in global oil prices is one of the most important problems confronting the country, second only to the peace negotiations with the FARC and the ELN. Oil prices are in a free fall, this week dropping as low as $50 per barrel, and Colombia’s reserves-to-production ratio is dangerously low. However, observers and policy-makers disagree over just how perilous the situation is and over what needs to be done.

Colombian business journal Portafolio published an opinion piece written by Rubén Darío Lizarralde Montoya, the executive president of the Colombian Chamber for Oil Products and Services (Campetrol). Montoya blasted the tax reform bill recently passed by the Colombian Congress, which raised the effective tax rate on corporate profits to 51 percent. He forcibly argued that that this decision will kill Colombia’s “goose that lays the golden eggs,” the oil industry. According to the piece, oil has fueled Colombia’s economic growth over the last few decades and has become “the spinal column of the Colombian economy.” He believes that the tax reform makes Colombia uncompetitive in comparison to its neighbors, and will cost the country 0.6 percent in economic growth and 132,000 jobs in 2015. He instead would have the government encourage foreign investment in the country’s oil industry with tax incentives.

Colombian Finance Minister Mauricio Cárdenas strongly disagrees. In an interview with Colprensa, he argued that although the fall in oil prices naturally has had a negative impact on growth in Colombia’s oil sector, the strengthening U.S. dollar will actual help Colombian industry and lead to a rebalancing of the Colombian economy. He explained that, “The oil industry represents 50% of exports, 16% of government revenue, and 5% of GDP. Although we have a high export dependency, in terms of general economic and financial matters, we are not as dependent on oil as some other producers, and this helps give us more options in navigating these turbulent waters … We can’t say that we are completely bullet-proof, because that would be an exaggeration, but we can say that we have a good macroeconomic policy and a diversified economy that protect us.”