17 Nov International Oil Prices and GDP Growth in Bolivia
Excited because in just a week I’ll be back in my country (after three months away) and will finally get to hug my dear Santi, I begin this new post. I genuinely wanted to write about the international behavior of oil prices and the factors driving it. However, after visiting the website of the Ministry of Economy and Public Finance, I changed my mind and decided to comment on a text that caught my attention—a lot of attention. Here it goes:
“Based on statistical data, [Minister Arce] demonstrated that in 2011 the price of a barrel of oil also suffered an abrupt drop from USD 113 to USD 75.4. ‘The following year (2012), it dropped from USD 109 to USD 77 (…) in 2013, it also fell, perhaps less, from USD 110 to around USD 90, but there was still a price decline,’ he indicated.”
“Arce emphatically stated that the country is already familiar with declines in international prices. He said that Bolivia has not been living off perpetually high prices, underscoring that there have been significant drops, ‘very similar to what is happening now.’”
According to the first paragraph of the quoted text, international oil prices declined in 2012 and again in 2013. Furthermore, it is mentioned that “Bolivia has not been living off perpetually high prices.” Let’s look at the international statistics. According to information from the U.S. Energy Information Administration (EIA), the annual average WTI (a key benchmark for international oil prices) differs from what was noted by the Ministry of Economy and Public Finance. I invite you to look at the following figure.
As observed, the EIA data is indeed different from the text provided by the Ministry of Economy and Public Finance. Between 2011 and 2014, Bolivia actually benefited from high oil prices. So, why the discrepancy? From my perspective, the Ministry’s text refers to “spot prices,” whereas I am referring to annual average prices. What does this mean? Let’s use an example: imagine you typically take a bus (say the Puma Katari) to commute to work and back, spending approximately USD 1.00 daily. But occasionally, due to unforeseen circumstances (say late in the morning after a big party or a romantic dinner the night before), you wake up late and must take a taxi, spending USD 10 per day on those occasions. Would it be correct to say your annual transport cost was USD 10 per day? Wouldn’t it make more sense to average all the days, including both bus and taxi rides?
When referring to “spot prices,” it’s like analyzing only the taxi days. Conversely, talking about annual average prices is equivalent to calculating the overall average (bus and taxi rides) for the year, where the “Pumita Katari” (as we call it with Santi) weighs more heavily.
Why is this small but significant statistical discussion important? Because when we compare the figure I presented earlier with the annual GDP growth rate, the reading of reality changes significantly. Below, I present the GDP growth rate for 2006–2013. I deliberately highlighted 2009 in bold as it shows the lowest growth rate during the period (3.36%). Now compare this result with the oil price figure I presented earlier, focusing on the bold year. Interesting, isn’t it?
This result doesn’t surprise me, as the export prices of Bolivian natural gas are almost directly linked to international oil prices. Now, considering the recent price drops observed in the past few weeks and the projection by many analysts of an average oil price of USD 80/barrel for 2015, the substantive question is: What growth rate can we expect in 2015 if oil prices continue to decline? Let’s first see what some institutions are saying:
Bolivian Ministry of Economy and Finance: 5.9%
ECLAC: 5.5%
International Monetary Fund: 5.0%
World Bank: 4.3%
These are various projections, likely done before the recent drop in price. Now, I propose the following exercise let’s “merge” the two previous figures, showing both GDP growth rates and WTI prices in a single chart. Below, on the vertical axis, you’ll see the GDP growth rate; on the horizontal axis, the international oil price (WTI); and as diamonds, the corresponding year. Coincidentally (or not?), high GDP growth rates occur when international oil prices were between USD 90 and 100/barrel.
The above chart is quite illustrative. However, a common critique of such analyses is that Bolivia’s GDP growth rate also depends on other factors, such as the performance of the agricultural and mining sectors. That’s why economists spend considerable time developing models to make reasonable forecasts—because in this “business,” 0.05 is not the same as 0.04. Using some models (which I won’t detail here), I find that if the WTI price averages USD 80/barrel in 2015 and Brazil’s economy grows around 1% annually, Bolivia’s economic growth would be approximately 4.5%, slightly higher than in 2010.
An old economist joke: Economists spend half their time predicting the future and the other half explaining why they were wrong. Thus, while making projections is quite entertaining, the main goal of this post is to highlight the significant relationship between Bolivia’s GDP growth rate and international oil prices. Thinking we’re shielded by a robust domestic market raises more questions than answers.
Well, dear friends, just eight days before returning to my beloved homeland, I send you warm regards. I can only wish you cherished reunions, and positive year-end evaluations this December.
S. Mauricio Medinaceli M.
Kabul
November 17th, 2014
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