Sunday, August 26, 2012

Well done BP, we hope others follow your research and development for reaching better social welfare


British Petroleum (BP) has improved her investment into economic field, this multinational broadcast an annual statistical report called “Statistical Review of World Energy”, this information is extraordinarily usefulness to economic researchers and others due to one can take it to make real economic comparison as this note shows, economic forecast about world economic growth and so. This type of Research and Development (R&D) is the type that humanity needs to improve social welfare. One hopes that other multinationals take this idea and broadcast statistical information according to their economic sector as BP does by free public uses. This note shows how British Petroleum Price Deflator (BP-PD) can be used to make real comparisons in Foreign Direct Investment (FDI) in Colombia between 1901 and 2011. Through the uses of this BP-PD, there is evidence that Colombia faced an important decline of FDI between 1970 to 1979 due to FDI regulation, exchange rate regulation and low crude oil prices between 1970 to 1973.



Author: Humberto Bernal,
Economist,




In economics there are procedures to compare money values through time. These procedures are called the uses of index prices or price deflators. These procedures come up due to there are nominal factors which make distortions into real economic analysis, some nominal variables that make distortions are inflation or/ and nominal exchange rate. Moreover under uses of this price deflator, then economic variables are put on actual perspective.

One of main price deflators is the USA GDP price deflator, this price deflator can be used to make international comparisons when data comes in US$ values, for instance economic variables such as Foreign Direct Investment (FDI), short run capital movements or international debts (liabilities) can be indexed by this price deflator to make sense time comparisons. However, USA GDP price deflator can be calculated since 1929, therefore it shows a time limitation if one wants to make a historical analysis of XX century FDI or other variable. Of course one can calculated unofficial price deflators or price index through Angus Madison Data (under Purchasing Power Parity Theory) or one can use British Petroleum Price Deflator (BP-PD), the last one is easier to make calculations. The BP-PD looks robust as figure 1 shows (blue line), one can see that it follows same path as USA GDP price deflator (dashed green lines) moreover BP-PD shows two main advantages on USA GDP price deflator. First it starts in 1861 while USA GDP price deflator starts in 1929 and second it is at 2011 prices while USA GDP price deflator is at 2005 prices, although the last fact is not a big issue, it makes values more up date to young people comparisons. 

Figure 1. British Petroleum and USA GDP implicit price deflators 1861 - 2011

Source: BP statistical review of world energy 2012 and Bureau of Economic Analysis.

BP-PD is a robust price deflator. A easier test to assert “the well behavior of BP-PD” is to plot it against USA GDP price deflator as figure 2 shows. The relation between these two price deflators is positive and its relation is not different of one under statistical hypothesis. Therefore, the relation between these two price deflators is close and one can use any of them to make time economic comparisons. In other words, BP-PD takes into account main economic facts as USA GDP price deflator does. 

Figure 2. British Petroleum and USA GDP implicit price deflators relation  1929-2011

Source: own calculations.

The usefulness of BP-PD

The BP uses her BP-PD to shows crude oil price at 2011 prices, through this information one can say that the crude oil price in 1864 was US$115.5 per barrel at 2011 prices while this price was US$111.3 in 2011, therefore there were years when crude oil price was more expensive than actual price, it means products made of crude oil were more expensive than same ones today or in other terms people probably faced lower quality of life in that time than today. For more information about crude oil prices at 2011 look BP  web page at statistical review of world energy 2012.

Figure 3. FDI as stock in Colombia 1901 to 2011
(US$ million at 2011 prices)


Source: own calculations with official data and secondary information.

The BP-PD can be used to make comparisons in FDI as stock in Colombia through 1901 to 2011 as figure 3 shows. For instance the FDI as stock in Colombia reached US$2,129 millions in 1901  while it reached US$8,425 million in 1935; US$12,567 million in 1991 and US$100.4 billion in 2011 all of them at 2011 prices. With this information the real average annual growth of FDI as stock was 3.6% between 1901 and 2011, moreover one can identify an important decline of FDI as stock between 1970 to 1982, this decline can be explained by previous crude oil nationalization (1951) that latter brought this effect, low crude oil prices at the begging of 1970 until 1973, high government intervention on exchange rate between 1969 to 1979 and FDI control through local Laws by that time. Moreover one can see that FDI as stock in crude oil sector shares an important value in total FDI as stock in Colombia, FDI in mining sector is important also, these two type of FDI share about 45%-50% of total FDI as stock in Colombia. Table 1 shows the main facts that can be identify easily on figure 3, for instance the beginning of high production of crude oil in 1919, the FDI regulation on 1967 or the 1991 free market regulation on FDI inflows in Colombia.

Table 1. Main facts in Crude oil sector and FDI regulation in Colombia 1901 to 2011


Year
Main Crude oil events in Colombia
Year
Main FDI events in Colombia
1919-1920
High crude oil production through Tropical Oil (subsidiary of Standard Oil New Jersey).
1935:
First government rules for organizing currencies flows including FDI inflows.
1940
Creation of government mine department.
1967
First rules about specific topics about FDI in Colombia.
1951
First and only government crude oil company called Ecopetrol.
1991
Rules modification about FDI inflows (strong emphasis in free market) and creation of the first Investment Promotion Agency in Colombia called Coinvertir.
1969
New type of oil contracts ( Association type).
2011
Colombia is a new member in OECD’s  list that highlight those countries that make efforts in promoting FDI.
1979
New rules with strong free market thought for crude oil sector (mainly in  exchange rate and local oil price).


2003:
New type of contracts in crude oil sector ( Concession type. Association type still working through Ecopetrol).



Source: own calculations with official data and secondary information.

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