Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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International Oil Prices and Economic Growth in Bolivia

Happy because in a week I will return to my country (after three months of absence) and finally hug my dear Santi, I start this new post. Genuinely I wanted to write about the behavior of international oil prices and the causes behind, however, thanks to a visit to the Bolivian Ministry of Economy and Public Finance webpage I changed my mind and decided to comment a text that I had my attention... here goes:

"Supported by statistical data [Minister Arce] showed that in 2011 the price of an oil barrel also suffered a sharp drop from USD113 to USD75,4. 'The next year (2012) from USD109 drops to USD77 (...) in 2013 also down, maybe less, from USD110 close to USD90, but still had lower prices', he said."

"Arce was emphatically to maintain that the country already knows the declines in international prices, he said that Bolivia has not been living eternally from high prices, he noted that there were significant declines, 'much like those that are happening now.'" (Click to read the full article)

According to the first paragraph of text transcribed, international oil prices have decreased in 2012 and 2013 and, further, it mentioned that "Bolivia has been not living eternally from high prices" well let's see some international statistics. According information from EIA (US agency) the annual average WTI price (international benchmark for oil prices) is different from that posted by the Ministry of Economy and Finance, I invite you to view the following graph:

blog.14.11.17.01.en

EIA data are really different those used by the Ministry of Economy and Finance, according EIA since from 2011 to 2014 Bolivia benefited from high oil prices. So, why the difference? From my point of view the text of the Ministry of Finance refers to "spot" prices while I refer to annual average prices. What? Come up with an example, imagine that you usually take a bus (say Puma Katari) to go to work and come home, and every day you spent approximately US$ 1.00; but because life is so funny (say a huge party last night or a romantic dinner with your partner) you woke up late in the morning and therefore you must take a taxi, in those days (taxi days) you spent $ 10 per day. In this sense, it is correct to say that the annual cost of transportation for you was $ 10 per day? Would not it be wiser to take the average of every day of the year, including taxi-days and bus-days? Well, when reference is made to the spot prices is as if we analyzed the situation only considering taxi-days and when it comes to average annual prices, is equivalent to averaging taxi-days and bus-days, where clearly the "Pumita Katari" (public transport system in La Paz) has a greater weight.

Why is it important this small but statistically significant discussion? It turns out that if we now compare the information that I put in the above graph with annual GDP growth, reality is very different, see. Here I present the growth rate of GDP for the period 2006-2013, I deliberately colored with "red" year 2009 because it has the lowest growth rate for the period (3.36%), now compare this result with the international prices graph previously presented (particularly the year marked in "red"), interesting isn't?

blog.14.11.17.02.en

This result does not really caught my attention, since of Bolivian natural gas export prices are related (almost directly) with international oil prices. However, given the fall in prices seen in recent weeks and taking into account that many analysts consider an average price for 2015 equal to US$/barrel 80, the question is: What economics rate of growth rate we would expect for Bolivia in 2015? Well, first let's see what some institutions say:

Ministry of Economy and Finance of Bolivia: 5.9%

ECLAC: 5.5%

IMF: 5.0%

World Bank: 4.3%

Maybe the projections were made before the observed price decline of recent weeks. Now I propose the following exercise, "get together" the previous two graphs, I mean, see in a single graph the GDP growth and WTI price. Below you will see on the vertical axis the GDP growth and on horizontal axis the international oil price (WTI) and in "red" the corresponding year. "Coincidentally" high GDP growth occur when the international oil is between 90 and 100 US$/barrel.

blog.14.11.17.03.en

The graph above is quite illustrative, however, one of the usual critics for this type of analysis is that the growth of Bolivian economy also depends on other factors, for example, the performance of agriculture and mining sectors; therefore, economists spend some time creating models that help make a reasonable forecast, because in this "business" 0.05 is not the same to 0.04. Using models (not the will detail in this blog) I find that if the price of WTI price for 2015 remains at an average of 80 US$/barrel and the Brazilian economy grows in the order of 1% annual growth, Bolivia's economy would be placed close to 4.5.%, slightly higher than 2010.

An old joke of "economists": economists spend half the time predicting the future and the other half explaining why they were wrong. Thus, although do projections is quite entertaining, the central purpose of this post is to highlight that there is a significant relationship between the Bolivian GDP growth and international oil prices. Think we are shielded by a robust domestic market, creates more questions than answers.

Well my dear friends, just remains eight days to return to my beloved country, I send a warm hug. I only can wish you for December few fights, very nice reencounters reunions and a positive assessments of 2014.

Mauricio Medinaceli Monroy

Kabul, November 17, 2014

 

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In the Blog section I invite you to read: "The future of Bolivian natural gas exports to Brazil"

 

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