Oil Price Drop Hits Latin American Economies

Today, the entire world has felt the impact of the COVID-19 pandemic and its economic and political consequences. While some oil producing countries are able to weather the storm, some rely heavily on oil production and are feeling the downturn. Prices remain low and volatile. According to the BBC, Latin American nations most affected by the oil collapse are Venezuela, Colombia and Ecuador, as government revenues depend directly on the value of their crude exports.

Venezuela’s case is particularly unfavorable. According to DW News, oil makes up for more than 90 percent of the country’s exports, meaning the country depends almost entirely on petrodollars generated by its NOC, PDVSA. The OPEC has stated that Venezuela, headed by Nicolás Maduro, continues to be the country with the largest oil reserves in the world. However, sanctions imposed by the US, low local oil production and the drop in the price of oil in international markets, have shaped a landscape of great uncertainty and instability for the country.

Colombia is another example of Latin American economies that have been critically impacted by the oil price drop and COVID-19. El País reports that almost half of Colombia’s exports derive from oil, which makes it an oil-dependent country. The spread of the virus has increased uncertainty, accentuating the devaluation of the Colombian peso against the dollar. Last March the dollar went above CO$4,000, the highest market rate in history.

Ecuador is suffering a similar fate. Though the oil price drop is not the only factor generating uncertainty in the country. In January 2020, Ecuador decided to leave the OPEC for the second time, after its first withdrawal in 1992. This decision was to increase its crude oil production and raise more income as it had already exceeded the maximum production quota set by OPEC. Ecuador extracted on average 537Mb/d day in 2019, while  OPEC’s established maximum quota is 508Mb/d.

While the rest of the world is still trying to find a strategy to deal with COVID-19, these Latin American countries may have to join efforts to face their current economic situation and improve the energy scenario within the region.