Colombia oil output keeps growing. When will rent-seeking kick in?

I give Colombian oil companies a lot of scrutiny because I see the hype and excitement sometimes blinding investors to possible problems. But this chart shows why there is excitement.

Crude oil barrels a day. Data: Agencia Nacional de Hidrocarburos

This is mostly a picture of a policy gone right — the country wanted to boost output and it’s done so. A question this raises for me is when nationalist, rentier populists are going to start raising more of a stink in Colombia’s oil regions with the usual argument that the foreign investors are getting rich while locals remain poor. It’s a cycle, according to people who are smarter than me.

there is an observable tendency of cycling back and forth between nationalization and privatization in both regions.

or this one, which is easier reading

Latin America has seen cycles of investment and expropriation. For example, in Venezuela large oil investments were made throughout the 1940s and 1950s; then starting in the late fifties a process of systematic increase in the government-take began. The fiscal-take on profits rose from levels around 50%, which prevailed in 1943-1958, to a maximum of 94% in 1974, the year before nationalization (Monaldi, 2002). In different periods, similar episodes have occurred in Argentina, Bolivia, Ecuador, Mexico, Peru, and other developing countries.

It’s possible that Colombia got it just right, and its fiscal take is going to be enough to keep the public happy without diminishing investment. We shall see.

UPDATE: The Wall Street Journal notes this same cycle, in Brazil.

5 thoughts on “Colombia oil output keeps growing. When will rent-seeking kick in?

  1. westslope

    Agressive freeriding is a risk in any country where a rapidly growing, technologically dynamic sector has enjoyed considerable success.

    Colombia manages to squeeze a few extra (millions) of dollars out of the companies through X-factor royalties. They have gone up in recent bid rounds. Especially for the lucrative Los Llanos basin and Putumayo district blocks. Letting upstream oil companies reveal their willingness to pay for the resource through an auction is a smart way of increasing social returns while creating the environment that will increase downward pressure on the cost of foreign oil exploration capital as seen from the perspective of Colombian citizens.

    I believe the finance minister wants to direct public funding to agriculture infrastructure not because agriculture is a good way of avoiding the economic crowding out of non-resource sectors but because it might provide a short-term boost to employment.

    Good post and historical reminder, though fears generated by events outside of South America appear to be currently driving Colombian junior oil company share prices down.

  2. NicaCat

    OK, westslope: Jesus, Moses: can you tell the rest of us (well, at least me), in real words, what this means? I, having had at least 2 gin and tonics, can’t follow what you’re saying here. BTW, just kidding on the G&Ts. Plain English here, please!!

  3. westslope

    OK NicaCat, I rolled my head back 25 years and yeah, I’m sympathetic.

    ‘Freeriding’ is the technical way of saying getting something for nothing. I free-ride of Skype for example.

    X-royalties means that a market determines new and additional royalties. The market manages price risk, not a committee.

    Willingness to pay is a fancy way of saying ‘demand’. Committees are occasionally clairvoyant but rarely. Markets reveal information that committees can only guess at.

    If government makes a mistake and charge too high royalties, companies will decrease capital expenditures and perhaps exit altogether. If companies exit, Colombians lose royalties, taxes, jobs, etc. Companies also bear 100% of the responsibility for the chosen additional royalties meaning that when commodity markets collapse, the temptation to bail out resource companies with public money decreases.

    Too low royalty rates could drive a boom that sees potential social benefits distributed to shareholders and workers, as well as accentuate boom ‘n bust cycles.

    Bailing out non-renewable resource exploitation companies with public money is conducive to a lower social return on the resource.

    ‘Social’ signifies that all Colombians own the resource and policy might want to target ‘social returns’ and not just private returns (shareholders, workers).

    “Crowding out” means that activity A increases and a result activity B increases. In this case, foreign investment chasing resources drives up the local currency and makes it more difficult for non-resource Colombian companies to export their services or compete with imports. A boom in resource exploration can also pull qualified workers away from other sectors of the economy because the typical wages are so much higher.

    Norway mitigates this ‘crowding out effect’ known as the Dutch Disease by running a large sovereign wealth fund that takes surplus royalty rents and invests them outside of Norway, mostly in non-resource activities if I recall. By taking Norwegian kroner and buying foreign assets, the supply of Kroners increases and thus pressure on the Kroner to go up declines. As a result, Norwegian non-resource sectors cope with a less formidable Kroner though the Kroner is an expensive currency by the usual measures.

    If the Finance minister wants to bring the peso to heel, he should set up a sovereign wealth fund. Santos has alread talked about that possibility. It would be a great signal of fiscal responsibility to the outside world, and would probably further decrease the cost of foreign capital.

    If investors like what they see and perceive less and less risk, they will be willing to bid up the price of shares in Colombian resource companies. That means venture capitalists and banks are willing to accept a lower expected risk adjusted return om the investment dollar.

    Example: I might expect 18% per annum or more before a risky resource investment in Colombia.

    In Bolivia, I might demand a 44% per annum return or better because of the perceived risk. Bolivians get less foreign capital at higher cost and as a result less foreign technology and expertise. In a manner of speaking any foreign technology and expertise benefits for Bolivians cost more.

    How did I do?

  4. westslope

    I typoed ‘crowding out’ beyond recognition.

    An increase in A leads to a decrease in B.

    Government borrowing up, private investment down. This is the neoclassical crowding out story and assumes limited supply of loanable funds which is clearly not the case.

    More resource investment and sales leads to less non-resource sector investment and sales. This is the Dutch Disease. A few years ago, North Sea oil created an investment boom that drove up the currency and brutally punished the rest of the economy that competed with foreign suppliers. I recommend reading the Resource Curse in the wiki-pages, and elsewhere.

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