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Tuesday, March 10, 2020

Fall in oil prices: this is how it affects Latin America

Key: Fall in oil prices, this is how it affects, Latin America, Oil price, cheap oil, Latin America, economy, Venezuela, Brazil, Mexico

The falling oil price sent stock markets down again worldwide. It could act like an economic stimulus package. Three examples from Latin America show how different the effects can be.

In the midst of the corona crisis, Saudi Arabia turns on the oil tap. On Monday, the oil price then fell as sharply as it had not in a day for almost 30 years. And some experts say it could drop to the 1990s level. For some countries, this is an economic disaster, for others the drop in oil prices could have the effect of an economic stimulus program. Three examples from Latin America show why.


The country has the largest oil reserves in the world, but hardly plays a role as an oil exporter. Between the years 2000 and 2018, the production volume has more than halved. The policy of the Socialist Unity Party (PSUV), which has ruled since 1998, is largely responsible for this, scaring away investors and at the same time causing conveyor systems and refineries to deteriorate. Even though the country is completely dependent on oil revenues. More than 90 percent of the foreign exchange reserves come from the petroleum sector. And the government desperately needs dollars to keep the supply crisis at bay.

In February 2020, President Nicolás Maduro set up a commission to increase production, which in January was a third below the level of the previous month, reports the US news service Stratfor. The drop in the price of oil will now make it even more difficult for the socialist government to secure basic supplies for the population. Even before the oil price shock, observers did not believe that Venezuela would finally collapse and sink into chaos this year. This has now become much more likely.


The largest country in Latin America had to import oil for decades. Then, in the early 2010s, a huge deposit was discovered off the southeast coast. There is now so much oil that Brazil has become the ninth largest producer in the world and the sector has an export surplus. The sector's share of the trade balance is significant, but not dominant at 13 to 14 percent. For this reason alone, the fall in oil prices will not hit Brazil as hard as Venezuela. The country also has an industry that could benefit from the inexpensive raw material.

For the government, the drop in prices is nevertheless a blow to the office. Because the oil sector not only generates tax revenue, but also flushes dividends into the state coffers through the state participation in the oil company Petrobras. The Brazilian state budget does not threaten to go wrong, but the proportion is too small. But there could be a lack of funds for investments in economic development - the state and the oil sector in Brazil.


In the second largest country in Latin America, there are many suppliers to US companies. In the meantime, Mexico could be described as the first and only industrial country in Latin America to date: In a Massachusetts Institute of Technology ranking on economic versatility, the country has by far the most diversified economy in the region and is on par with Italy and Norway.

Mexico also produces significant quantities of oil, but it has to import more oil products than it sells. A falling oil price will reduce the sector's income, but it will benefit the economy as a whole, because transportation and energy costs will decrease.

The corona virus and the trade dispute between China and the USA are clearly more threatening for the already weak economy in Mexico. Should the US economy stumble and thereby reduce the northern neighbor's demand for goods from Mexico, this could become a real problem for Mexico.

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