Oil and its effect on the Colombian economy

In the Colombian finance world, everyone is debating what the Colombian Central Bank will do regarding the country’s interest rate it its meeting today. On Wednesday, we talked about the depressing similarities between the Colombian Peso and the Russian Rouble, and Russia dramatically raised its interest rates by 75% this week. Will Colombia do the same? According to most observers, the Colombian Central Bank will likely do nothing. Reuters explained that despite a 40% fall in oil prices since June, Colombia’s oil income, when converted to U.S. dollars, has only fallen by 4.5%. The country’s economy grew by 4.2% this quarter, making it the fastest-growing major economy in the region. In addition, inflation in Colombia is well within the Bank’s target range. In fact, the Central Bank likely views the devaluing of the peso as good news, though its volatility is certainly a concern.  The Financial Times agreed with Reuters, and added that the only decision to expect is an end to the Central Bank’s program of buying U.S. dollars.

El Colombiano reported that investment in oil exploration will likely fall by 50% in 2015, a development that is really worrying the Colombian oil industry. The report noted that Colombia’s reserves are already dangerously low for a country that depends so heavily on oil for government revenue. However, just between the two largest oil companies in Colombia, Ecopetrol and Pacific Rubiales, investment in exploration will decrease by $1.35 billion. Many industry observers are hoping that that the large players in the industry will look to cut costs and save money on other aspects of the operations, not production.

Colombia’s eastern plains region, known as “Los Llanos,” is already feeling the effects of the fall in oil prices. This region, one of the primary oil-producing regions in Colombia, has benefited greatly from the oil boom, so it makes sense that it would be equally hurt by the troubles besetting the industry. However, this region is also working to overcome its troubles with the FARC and other illegal armed groups in Colombia, so this hit to the region’s economy comes at a particularly bad time.