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    Biggest news for Latin America – low oil prices

    Andres Oppenheimer: Biggest news for Latin America: low oil prices
    12/27/2014 7:00 AM 12/26/2014 7:07 PM

    While other issues dominated the headlines, the most important news for
    Latin America in 2014 — and the one that will have the biggest impact in
    the near future — was the dramatic collapse of world oil prices.

    Granted, other news such as President Barack Obama’s recent announcement
    that the United States will normalize relations with Cuba and the
    reelection of Brazilian President Dilma Rousseff will no doubt have an
    impact. But nothing is likely to change the region’s political map like
    the decline in world oil prices, which have plummeted nearly 50 percent
    since June to the current level of about $55 a barrel.

    According to a new International Monetary Fund study released last week,
    it’s a trend that is likely to stay with us in coming years.

    The study, by IMF economists Rabah Arezki and Olivier Blanchard, notes
    that the oil futures market suggests that prices will rebound slightly
    to about $73 a barrel by 2019, but that they will remain depressed
    compared to their levels of recent years. Oil prices hit a record of
    $145 a barrel in 2008.

    The main reasons behind the decline in oil prices are the energy
    revolution going on in the United States, which has dramatically
    increased oil production thanks to a new technology known as “fracking,”
    and a decline in the demand of oil because of the recent world economic

    Oil importing countries will be the big winners, and oil exporters such
    as Russia, Venezuela and Ecuador the big losers. But, world-wide, the
    international economy will be better off, with an increase of between
    0.3 and 0.7 percent in the world’s gross domestic product in 2015, the
    IMF paper says.

    In Latin America, by far the most hard-hit country will be Venezuela,
    which relies on oil for 95 percent of its total exports.

    Since the 1999 Socialist revolution of late President Hugo Chávez,
    Venezuela has virtually decimated its private sector, and has become
    more oil dependent than ever.

    At the same time, Venezuela has failed to invest in new oil-refineries,
    and its oil production is falling rapidly.

    With inflation in Venezuela estimated at an annual rate of 70 percent
    and its economy shrinking by 3 percent this year, most economists agree
    that unless the country makes a political U-turn and adopts
    pro-investment policies, it will be lucky if it can avoid
    hyper-inflation over the next few years.

    The new energy landscape has suddenly turned Venezuela from a major
    regional player — which bankrolled more than a dozen Latin American and
    Caribbean nations in exchange for their political loyalty — into an
    increasingly weaker political actor.

    Venezuela’s clout in the region has been directly proportional to world
    oil prices: when oil prices were on their way to an all-time record in
    the mid-2000’s, Chávez was campaigning to become a Third World leader.
    Now, Venezuela cannot even keep its closest ally, Cuba, from seeking
    economic relief from the United States.

    Brazil, Mexico and Argentina are also likely to suffer somewhat from the
    decline in oil prices, but nowhere nearly as much as Venezuela or Ecuador.

    With depressed oil prices, Brazil and Argentina will have a harder time
    attracting investments for their recently discovered massive oil
    reserves. And Mexico may see fewer investments than it expected after
    its major energy reform this year, economists say.

    But other factors will make up for these potential losses, such as
    bigger purchases from China and the United States, two major oil
    importers that are benefiting from declining oil prices.

    My opinion: Granted, the U.S.-Cuba thaw and Rousseff’s reelection will
    have a political impact across the region, but perhaps not as much as
    their respective headlines may have suggested.

    Obama’s normalization deal with Cuba is likely to be watered down by the
    Republican-controlled Congress, and by Cuba’s regime, which needs a
    foreign enemy to justify its repression of fundamental freedoms at home.

    Brazil’s president, in turn, will take office Thursday as one of the
    weakest Brazilian leaders in recent history. Not only did nearly 50
    percent of Brazilians vote against her, but she will have significant
    opposition in Brazil’s Congress, and — perhaps more important — faces
    growing revelations of government corruption in the Petrobras oil company.

    But none of these headlines will affect the region as much as the sharp
    decline in oil prices. Latin America’s petro-populist countries have
    suddenly become weak, and the ones with economically responsible
    governments will become increasingly assertive in the regional scene.
    Things are changing.

    Happy New Year!

    Source: Andres Oppenheimer: Biggest news for Latin America: low oil
    prices | The Miami Herald –