Economic benefits from improving infrastructure to import crude oil at the end of the next 7 years, Colombia case

This note deals with economic benefits from crude oil products’s demand such as petrochemicals and  pipeline crude oil transport in Colombia. These benefits are evaluated according to five main economic sectors’ supply increase and a comparison to building sector. The main conclusion for Colombia case is that an increase of 10% of each demands, colombia will face a  total domestic supply annual increase between 0.32% and 0.37% in the short run. In the long run, this development in these crude oil products will bring high employment and economic growth. A second conclusion is colombia shopping rooms’ rents is too high for tenants and it makes a final product price too high, it is valuable that government call for a Law which makes regulation on this sector to reach a fair rent.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download in PDF format here.


In 1973 the Nobel Price Committee awarded Wassily Leontief “for the development of the input-output method and for its application to important economic problems”. After 40 years his methodology is still used by researches to evaluate positive and adverse chocks in the economy, for instance Blair and Miller (2009) deal this methodology in detail.

Through Leontief’s methodology one can give information about economic sectors’ growth due to increase in specific sector demand. For Colombian economy is interesting this mythology because public resources and efforts can go to those activities where higher growth is in the short run. Table 1 shows the economic impact due to final demand increase of 10% from five economic sectors. Table 1 shows results after dealing with data set from colombian input-output transactions table from 2000 to 2010. The first sector is crude oil extraction demand and an increase of 10% of this final demand, then agriculture supply will face an expected increase of 0.2% in a year and the total domestic supply will face an increase of 0.32% in a year. In the case of increase of 10% in pipeline crude oil transport demand, the mayor sector affected will be manufacture’s supply in 0.25% in a year. One can see that increases in crude-sector will show similar increase in domestic supply (final row table 1). Nevertheless an increase of 10% construction demand will bring an expected growth of 0.71% in total domestic supply. Therefore, government will make sense if it increases any of these demands but it has to be aware that Colombia has crude oil reserves for the next seven year only. Therefore if it wants to increase pipeline crude oil transport or petrochemical's demands, it must be aware that Colombia must have an infrastructure to deal with imported crude oil, the closer supplier is Venezuela. In consequence Colombia best strategy is to start to develop infrastructure which pulls petrochemical and pipeline crude oil transport, mainly for imported crude oil.  it is right to highlight that government can pulls up any economic sector demand through public spending.

Table 1. Increase of final demand in 10%  from selected economic sectors and their effect in sectors supply, Colombia case. (annual increase %)

Supply by sector	I. Crude oil extraction demand	II. Pipeline crude oil transport demand	III. Petrochemicals demand	IV. Building demand
Agriculture’s supply	0.02	0.14	0.07	0.40
Mining’s supply	0.01	0.06	0.04	0.26
Manufacture’s supply	0.03	0.25	0.10	0.62
Public services’s supply	0.03	0.10	0.17	0.15
Services and commerce’s supply	0.07	0.16	0.08	0.12
Total domestic supply	0.32	0.36	0.37	0.71

Source: National Bureau of Statistics of Colombia (DANE) and own calculations. 

Moreover, building sector is one of the economic sectors that brings more economic growth but the problem is the  rent of finished homes and shopping rooms which face final consumers. In Colombia a shopping rent is to high, landlords wants to get a return of the total investment in approximately three year!!!. It lets high costs to those who want to develop a business, therefore there is a claim to regulate shopping room rents through Law. The idea is a rent which takes into account market interest rate (CDT’s rate) plus no more than 3 percentage points.