Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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Blog.056

International Oil Prices and Oil Tax Revenues in Bolivia

Economy is about flows and stocks, this feature led many good people (economists or not) to study economic issues through Physics conventional instruments... yes, Physics. I'll try to explain this phenomenon through the following experiment, imagine a society of 6 persons where each one has 5 candies, then we would have a society where wealth is distributed equitably, 1 person 5 candies (16.7% of population owns 16.7% of wealth) as shown in the following figure:

blog.14.12.09.01

Well, now imagine that Mr. Pizza suddenly achieves an exceptional pizza that everyone wants to try it, then the rest of society gives to Mr. Pizza some of their wealth to get such delicious pizzas, the new situation would look like this:

blog.14.12.09.02

Could we classify this new situation as unfair? Since there is now a new "rich" in town, Mr. Pizza. Some analysts might mention that: 16.7% of the population (Mr. Pizza) owns 50% of the wealth (15 of 30 candies) that could even justify an increase in taxes to Mr. Pizza to help poorest. This claims sound familiar to you? But the story doesn't end there, perhaps Mr. Pizza now decided to expand his restaurant, improve health and education for his family and support art; therefore gives them part of his wealth to the constructor, the doctor, the teacher and the sweet ballerina, the new situation would be like this:

blog.14.12.09.03a

Because economic flows within a society depend on many factors, a lot of economists discussed and still discuss this issues, always confronting ideas about Government participation inside economy in order to reach more "just" societies.

Now assume that this small society is Bolivia and now the Government decides to sell part of the wealth of these six persons (natural gas) to Brazil and Argentina, so in the new situation the Government gets "candies" from both countries in exchange of nation's wealth (natural gas) something like this:

blog.14.12.09.03

Now the government decides to "spend" these additional resources in certain sectors of the economy, for example, encourage construction, health and education, so the new situation would be:

blog.14.12.09.04

Several questions arise: If the flow of resources from Brazil and Argentina diminish, what happens in this economy? Mention that a "strong domestic market" could replace these resources sounds nice, but in fact, How this small economy will get more resources? Will the government increase national debt? will use international reserves? Using above simple example, how the economy will get more candies? If what the Government sells is the wealth of the 6 persons (natural gas), why the current president appears as the social benefactor?

While there are plenty of answers and a lot to discuss to previous questions, I want to draw attention to one of the central facts: a decrease in gas exports value to Brazil and Argentina must necessarily have an impact on Bolivian economy.

All this introduction serves to motivate the reading of the information presented below. Through it I'll try to anticipate the tax revenues impact using different values of international oil prices. Following table, shows fiscal revenues (for each institution) from IDH production tax (32%) at different international oil prices:

Table 1: IDH Fiscal Revenues (32%) at different international oil price levels (Million US$)

blog.14.12.09.05

For example, if the international oil price is US$/barrel 100 cash transfers to senior people (Renta de la vejez) from the hydrocarbon sector will reach $US 687 million, however, if price drops to US$/barrel 60 the contribution of this sector would be $ 431 million.

The following table presents the sensitivity of tax revenues from royalties and participations (18%):

Table 2: Royalties Revenues (18%) at different international oil price levels (Million US$)

blog.14.12.09.06

For example, if the price is US $ / barrel 100 (as estimated will be the average of 2014) producing departments, Beni and Pando receive US $ 843 million, but if the average price decreased to US $ / barrel 60, the collection is US $ 528 million.

Now I show the sensitivity of the estimated 2015 total fiscal revenue loss at different levels of international oil prices:

Figure 1: Possible Revenues Fiscal Loss 2015 (Millions of US$)

blog.14.12.09.07

For example, if the average oil price in 2015 is US$/barrel 80, then fiscal revenues loss could reach US$ 661 million, if the average price decreased to US$/barrel 60, then such loss could be US$ 1,316 million. Please note that I'm not considering the additional revenues (very modest) thanks to the hydrocarbons "nationalization". Also I present this losses as % of GDP:

Figure 2: Possible Fiscal Revenue Loss for 2015 (% of GDP)

blog.14.12.09.08

Well my dear friends I hope that the information presented can be useful for you, I can only wish you a very nice Christmas, whishing that the message of love and peace will be more powerful than the delirious, aggressive and frantic buying gifts behavior that usually can be observed in these dates.

Mauricio Medinaceli Monrroy

La Paz, December 9th, 2014

 

Comments 

 
0 #2 Mauricio Medinaceli 2014-12-11 10:50
@Herbert, gracias Ing. igual para su linda familia.
 
 
0 #1 herbert Muller 2014-12-10 13:25
Estimado Mauricio
Clarísimo, bien explicado y pedagógico.
Felicidades y que ademas tengas una feliz navidad y un exelente 2015
Herbert
 

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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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