Oil exploration: the dollar at 7 thousand and the effects if it stops in Colombia – sectors – the economy

In the presidential campaign, defined this weekend, one of the issues raised the most is the possibility that the state could suddenly change its policies on energy transition, prohibiting the signing of new contracts for oil and gas exploration. , as candidate Gustavo Petro has repeatedly said.

Although various economic scenarios have considered a gradual reduction of this activity to give a greater impetus to unconventional renewables, one aspect that is not simple is what will happen to the economy and to Colombians on their feet, in their daily lives, if they choose the path suggested by Petro.

In its proposal, Petro textually proposes in its government plan to “stop granting new licenses for hydrocarbon exploration, ban exploration and exploitation of non-conventional deposits (fracking), as well as suspend pilot fracking projects and develop offshore fields. In the event that the ongoing reserves are exploited, they can be used for internal consumption.”

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But the analysis by the Corficolombiana research team put in black and white the effects of this decision on key variables such as the dollar price or the trade deficit, as well as on the fuel supply of millions of combustion vehicles and the resources that finance the government and regions, in which oil plays a major role, since before the pandemic and the rise Current prices, in 2019, transferred more than 23.5 billion pesos between contributions to the government and revenue for the provinces.

Investing in diving and importing crude oil

To conduct the analysis, economists in this entity start from a scenario that, from 2023, projects already approved for the development of the discovered resources will be implemented, and consider the development of a small proportion of the potential reserves potential (2P) and possible (3P), a situation that does not mitigate That investment in already approved projects is discouraged from continuing at the planned rate.

Indeed, a policy that discourages investment will result in a reallocation of capital toward other countries with less hawkish positions, such as Brazil, where presidential candidate Luiz Inacio Lula da Silva has withdrawn from Petro’s vision on energy matters.

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The effects will appear from next year and will reach their peak in 2027, with a sharp depreciation of the exchange rate and a deterioration in the balance of trade and imports.

Indeed, Corficolombiana warns that in this new reality, exploration wells will only be drilled with contracts in place prior to the NEP and no new developments will take place in resources discovered without concession or those identified through pilot tests in unconventional deposits from during crushing. Technique.

This will lead to a sudden collapse in oil production starting in 2023, as the level drops from about 745,000 barrels per day today (January-April) to 400,000 barrels per day in 2028, which means that the country has become a net importer of oil. crude since 2029, and by 2040, the country will have completely exhausted its crude production.

dollars, at $7,000 in five years

According to the forecasts of Corficolombiana economists, the cost of suspending oil exploration has been defined as the difference between the expected values ​​of the exchange rate, trade balance and imports in the scenario where new exploration is suspended and there is a decline in the development of oil resources discovered versus a second scenario in which exploration and production activity is maintained.

“We estimate that the effects will appear from next year and will peak in 2027, with a strong exchange rate depreciation and a deterioration in the trade balance and imports,” the document reads.

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The above is because, since crude oil is the main export product by value, other sectors that completely replace it are not seen.

Thus, by 2027, according to Corvicolambiana, the nominal exchange rate devaluation will be between 39.9 percent and 43.7 percent, which means that the dollar will be priced between 5080 pesos and 7020 pesos in 2027, while the goods trade deficit will increase between 15.4 percent and 38.6 percent, while the value of imports will shrink between 4.8 percent and 8.9 percent.

The study warns that “the above will have a severe impact on consumption and investment in the Colombian economy, which would certainly be dragged into recession.”

From deficit to trade pocket

In addition, CorviColombiana reports that foreign sales of oil and its derivatives will rise from $13,500 million to $3,900 million between 2021 and 2026, an annual decline of 17.8 percent, taking into account long-term forecasts made by the International Energy Agency. Brent crude barrel.

In addition, the damage to the trade balance would be two-way, because in addition to contracting foreign exchange earnings from sales of crude oil, the amount of imports would rise ostensibly by having to buy them abroad, which they would have. To use foreign exchange it must come from non-oil sources.

“The decline in oil production, with the subsequent decline in foreign sales of crude oil and its derivatives, has led to a deterioration in the trade deficit that has led to a contemporary depreciation in the exchange rate. Entity experts, in turn, stress that currency devaluation puts downward pressures on imports and encourages increased exports. This could offset part of the negative impact of this shock on the trade balance.”

But this positive effect on exports has a long lag, because in the short run supply cannot react quickly to a sharp devaluation of the currency. In addition, the effect is limited if there are inputs of these imported products.

According to Corficolombiana’s economic analysis document, between 2023 and 2026, the trade deficit increased by an average of 25.5 percent, peaking at 38.6 percent in 2027, while the strong depreciation of the currency generates a negative impact on imports, which It will decrease by 4.8 percent.

And in a higher and longer trade deficit, in the midst of a rising dollar, it will subsequently have an effect on inflation, reducing the purchasing power of the population.

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