Silver market in Colombia and World economic activity

The silver market has been small in Colombia since the end of XIX century; other countries in the region produce higher volumes of silver such as Bolivia, Brazil, Chile and Peru. Colombia has given 0.14% of total World silver extraction since 1900, so “El Dorado” is just a myth. Moreover, the silver market can be taken as a predictor of economic activity; these two variables are countercyclical, and in Colombia case as GDP faces an increase of 1.0%, the silver market faces a decrease of 0.57%. This result can be extended to World economy; as one realises the international gold and silver prices have shown an important reduction since the end of 2013, so it is expected that investors make their job in real sector. This scenario takes place because of gold and silver are taken as deposit of value for investors when economic crisis take palace.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Colombia as others countries in the region such as Peru, Chile and Bolivia have taken the international attention for their precious metals such as gold and silver. However, the huge volume of these precious metals that were expected through the last half of XIX century and the first decades of XX century was disappointed for Colombia case; foreigners were expected to find huge volumes of these precious metals, but they did not find the place called "El Dorado”. This note can be taken as the second document about precious metals extracted in Colombia during XX and XXI century; the first document was about gold, see my weekly note April 21 of 2013. The point of this note is to show the main statistics of silver extraction in Colombia, and highlight the counter-cycle movement of silver market in Colombia and Colombian economic activity.

Colombia is a small country in silver production. Colombia has produced 1,577 tons of silver since 1885; it means an annual average production of 13.3 tons; this volume of silver can be valued in US$293 millions in 2013; it means 0.1% of Colombian GDP in 2013. The total volume of silver extracted from Colombia since 1900 shares in 0.14% of total World silver extraction since 1900; it means that Colombia is not a main supplier of silver such as the United States, Bolivia, China, Mexico, Russia and Australia. 

Colombia used to extract high volumes of silver at the end of XIX century and beginning of XX century. Antioquia, Bolívar, Chocó and Córdoba are the main regions in Colombia where silver is extracted, but at the the end of XIX century and beginning of XX century were Antioquia, Chocó  (Cauca region in that days) and Tolima. The total volume extracted  between 1885 and 1902 was 50% of total silver extracted until 2013  as one realised in figure 1. Moreover, it takes attention that as international economic crisis started, the volume of silver extraction increased; for intense, after 1929 crisis and 2008 crisis.

Figure 1. Silver production in Colombia 1900-2012

(annual production, Troy once) 

Source: 1900-1910: Ocampo,A. 2013 (1984). Colombia y la economía mundial; 1913-1921: Mineral statistics of British Empire and foreign countries 1913-1922; 1923-1930: Poveda, R. 2005. Historia económica de Colombia en el siglo XX; 1931-2012: UPME, Colombia webpage.

Silver price has shown an important increase in the last years, but this trend is changing. The average silver price since 1900 is US$8.2  per troy ounce in 2013 prices; however, after 2008 crisis the silver price increased to reach US$31.2 per troy ounce in 2012. In 2013, this price decreased to reach US$23.8 per troy ounce as figure 2 shows. This dynamic can be explained by the desire of society, mainly financial markets, to keep their  wealth under dollar depreciation. Moreover, the silver-gold relative price has shown an important decline since 1980; by 1980 the silver relative  price was 0.036 troy ounces of gold, and in 2013 this price was 0.017 troy ounces of gold; this can be explained by huge silver reserves; while gold World reserves were 52 thousand in 2012, the silver reserves were 540 thousand in 2012.

Figure 2. Silver international price

(annual average price, US$ constant prices of 2013 per Troy once) 

Source: USGS and KITCO.

The global economic crisis is ending 

The price of silver and gold showed an important decline in 2013, so this is an  economy signal that global economic crisis is ending. The international silver price was US$31.2 per troy ounce in 2013 and US$23.8 per troy ounce in 2012, and the international gold was US$1,668.9 per troy ounce in 2012 and US$1,411.2 per troy ounce in 2013; moreover, through the first moths of 2014 these prices have shown lower values; for  intense, silver price was US$21.8 in february of 2014 and gold price was US$1,323.6 in february of 2014. If one takes this information and applies an econometric model of supply and demand for Colombia silver market, one realises that economic growth and silver market are countercyclical. It means as the volume of silver demanded shows a decline, the economic activity takes an upward path or the other way around; in Colombia case, an increase of 1.0% of Gross Domestic Product, the silver market shows a decline of 0.57% as table 1 shows (green row). This table shows the positive supply slope and negative demand  slope; moreover, the supply is inelastic while the demand is elastic; the elastic demand can be explained by close substitutes such as gold. One realised that FDI in mining sector in Colombia pushed up the silver production in about 1.0% when this type of investment increases in 1.0%; finally, gold is a substitute of silver; as gold price increased in 1.0%, the silver demand increased in 4.8%. 

Table 1. Supply and Demand for silver in Colombia 1900-2012

(annual data, variables in natural logarithms, econometric model under 3SLS)

Variables	Supply	Demand
Silver price	0.73%	-4.74%
FDI in mining	1.00%
GDP	-0.87%	-0.57%
Gold price		4.80%
R2	0.65	0.98
Observation	108	108

Source: Own calculations Stata 12.1.

Economic openness in Colombia?

Colombia has been going with economic openness since her independence. However, there have been moments when Colombia increased her tariffs in order to protect her internal market production. Nowadays, Colombia has signed many Free Trade Agreements; for instance, Canada, the United States, European Union and many other countries. Nonetheless, it appears that Colombia instead of reducing her tariff in the last 4 years, she is increasing them; this statement is validated through local data and World Trade Organisation's data. The problem of protectionism is that it makes the local production lazy and unproductive, moreover local consumers have to pay higher prices for goods that can be cheaper whether economic openness works really. Therefore, it can be a call for local authorities to improve their work on better programs for productive industry and to make a really economic openness where consumers enjoy high quality and cheap goods.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Colombia is a country that depends on huge volume of imported products as many countries in the World, so she has been working on her economic openness since her independence at the beginning of XIX century. However, in some cases she has taken decisions against this objective; moreover, in the last years she has been signed many Free Trade Agreements; nevertheless, the average tariff instead of going down, it has gone up. This note shows the main periods when Colombia has increased her tariffs in order to protect her internal market, and the contradictory behaviour against Free Trade.

At the end of civil internal war called the Thousand of Days' War in 1902, Colombia decided to increase her tariffs in order to promote internal production; after this war, Colombia was in a deep economic crisis, and one can say that this decision was correct in oder to promote internal production. Years latter, Colombia had an economic crisis because of international commodity prices were down, so the the volume of foreign reserves went down also, and government decided to increase the tariff for imported goods to recover the volume of reserves. This increase is showed in figure 1; therefore, through 20’s and 30’s Colombia faced high tariffs; it can be explained by the economic crisis of 1929 also; this crisis brought scarcity of foreign currency (dollars) and Colombia had gotten a huge debt with the United States and the United Kingdom mainly; therefore, it sounded good to increase tariffs to sort out the Balance of Payments Crisis (B.P.C) on 1931. Same situation was by 50’s; Colombia faced again a B.P.C and increased her tariffs. However, the tariff tendency through these years was downward; it means that Colombia was opened to foreign products in general although there had moments when tariffs were higher. This policy was wrapped up with Colombia new economy model started in 1991; the new economic model was in favour of economic openness.

Figure 1. Average tariff in Colombia 1910-2012

(%*)

* It is calculated as the share of value of taxes for imported goods divided in total value of imported goods in percentage.

Source: Central Bank Colombia; Bureau of Statistics Colombia and own calculations.

However, the tariff in the last years, after signed many Free Trade Agreements, are showing  an upward tendency. Again, figure 1 shows that the tax charged for imported goods as a share of total value of  imported goos went from 5.8% in 2009 to 6.2% in 2012; it means more charges for imported goods. This data goes with World Trade Organisation’s information also; this organisation broadcast that the average tariff  in Colombia increased form 8.4% in 2011 to 8.8% in 2012; of course years before this tariff was higher, but nowadays the tendency is changing.

Colombia has to be part of a World free of frontiers

Colombia as all countries has her foreign immigrant policies; these policies have improved from high restriction when the Spain Crown blocked high volume of foreigners because smuggling in XVI century to ask VISA to some countries in XXI century. In XXI century, as many western countries such as the United States and countries of the European Union are reviewing her foreign immigration policies to get a World free of frontiers, Colombia has to review it also. Colombia has an old immigration policies where some World citizens need VISA to visit Colombia without clear argument. Colombia has to think on a long run foreign immigration program where foreigners no matter their nationality are welcome to work as employees or businessmen, or as a students or tourists; moreover giving the welcome to refugees and asylees also. Colombia missed important foreigners because of internal war conflict, so it is time to call them again through a proper immigration policy. Therefore, Colombia has to contribute on getting a World free of frontiers as many countries are doing.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Colombia has not been an important country for foreign immigrants such as the United States, France or the United Kingdom; moreover, Colombia did not get an important volume of foreign immigrants at the beginning of XX century as many others countries did in the region such as Argentina, Brazil or Uruguay. However, many foreigners have taken Colombia as a home because they have found economic opportunities and gotten on well with locals. As many countries, Colombia has promoted foreign immigration policies and she has blocked foreign immigration also. Therefore, this note deals with foreign immigration in Colombia since Spain Crown colony; it is a short summary about immigration policies in Colombia and foreigners that found Colombia as a home.

During colony period when Spain was the owner of some places in Latin America included Colombia, the policy for foreign immigrants was high restricted. The Spain Crown did not let many foreigners to visit Colombia; they were worried about gold and silver smuggling, and spices and slavery smuggling also. However, there were few foreigners that lived in Colombia because of they had high professional skills in mining extraction and slavery trade approved by the Crown; of course these foreigners that traded species and slaves paid taxes. The foreigners that lived in Colombia by that time (1530-1816) were from Portugal, England, Italy, France and Jews as Vila (1979) says.

As soon Colombia started her fight to get her independence, foreign immigration increased. Colombia got support from approximately 7,000 foreign legionaries to get her independence; these legionaries came from England, Ireland, France, and Poland; they got a salary and recognition of local people as Colonel Rooke from Ireland got. However, some of them were charged by breaking the Law as Brown (2004, 2005) says. 

Because Colombia faced low population after her independence in 1819, the government decided to promote foreign immigration, but it was an unsuccessful policy. By 1823, Colombia counted with 1.2 million of people that was considered low, so local authorities decided to promote foreign immigration; nonetheless, this policy was selective because local authorities thought that just people from Western Europeans and North Americans could improve the local breed!; so they gave incentives such as lands and money to get these foreigners in Colombia. This policy was active until the end of 1920 decade. However, few foreigners from other countries came to Colombia avoiding these policies through illegal access or under immigration officer approval. This selective immigration policy was unsuccessful because Western Europeans and North Americans found tropical diseases, non-arable land, difficult tropical weather, poor infrastructure to run a business and in some cases breach of incentives given by local authorities. The few foreigners that stayed were from England, France, Italy, North America, Germany, Syria, Libya and Palestine; they can be taken as people with businessman thinking. There were some Japanese, Indians, Chinese and Africans that came to improve the labour force also; these foreigners got a salary also, but in some cases they faced discriminatory treatment by few people such as church members and local conservative people. Nevertheless, they could get on well with most of Colombian people at the end.

After the end of 1920 decade, Colombian government changed her immigration policy because of deep industrial development. Since 1920 Colombia started to face an important urban development, so local people started to move from rural areas to cities; this internal immigration brought low work force to grow lands, so government decided to promote foreign immigration to improve agricultural production. Moreover, after 1930 the industrial sector in Colombia started to grow at high rates, so professional people from abroad were needed to improve this development.  Therefore, Colombian government changed her foreign immigration policy giving lands  and economic incentives to people who could contribute with agricultural and industrial development; in this foreign immigration policy, the nationality no matters; moreover, the rights for foreign immigrants improved through Constitution reform in 1936; they got civil rights equal of Colombian’s rights, but they could not vote still. However, Colombia started to ask for a VISA since 1927 because local authorities thought that  foreign people with Law problems or political thinkers could make disorders through local population. During the Second World War (WWII), many countries that agree with Grand Alliance's view blocked immigrants from Axis countries; Colombia decided to do it between 1940 and 1948; from 1949 the promotion of foreign immigrants came back, and this policy went until the end of 1950 decade when Colombia decided to follow international Law about foreign immigration through International Organization for Migration (IOM).

Figure 1. International immigration stock in Colombia as a share of total population 1925-2012

(%)

Source: Bureau of Statistics Colombia (DANE), DAS, World Bank, IOM and Palgrave International Statistics. 

During 1960 and 1980 Colombia faced high emigration because low salaries and better economic condition in Venezuela and Ecuador, so Colombia faced an important reduction of foreign immigrants also. Unfortunately, Colombia faced low economic growth and political crisis between 1960 and 1980; these events started at the beginning of 1950 decade, but people started to emigrate to other countries at the beginning of 1960 because things did not go better. However, there were few Eastern Europeans that came to Colombia because communist thought pushed them out of their countries, and Colombia was member of IOM that were clear about refugees and asylees treatment. As soon local government realised this emigration broadcast a set of Laws that gave incentives to Colombians and foreigners to come back to Colombia, and few of them did it; however, the program was unsuccessful at the end because internal war started to be more intensive. 

Between 1985 and 2004 the number of foreign immigrants show an important decrease because  internal war. The internal war in Colombia started to get worst since 1980 because illicit drugs started to support it, so foreign immigrants decided to leave Colombia. Foreigners from Asia, Europe and North America leaved Colombia because of kidnaping started to be a politic and finical instrument for illegal groups; the number of foreignness kidnaped between 1984 and 2004 were 895 cases at least, and between 1971 and 2011 were 1,051 at least; therefore, the 85% of foreigners kidnaped were during 1984 and 2004. However, Colombian government improved the Law for foreign immigrates through the right of vote in local elections and popular queries through new Constitution in 1991 and  following Laws.

Figure 2. Foreigners kidnapped in Colombia 1971-2012

(number of people)

Source: Cífras y Conceptos, Centro de Memoria Historica, and  País Libre.

Since 2004 Colombia improved the foreign immigrants because better security and economic growth. Colombia improved her internal security and foreign immigrants came back, but the cost was high because last years insecurity. These new foreigners have come since 2004 and have the duty to contribute to Colombia economic development and local government has the duty to support them under fair income distribution. Therefore, Colombia has to work hard on a clear immigration policy where all World people are welcome no matter her nationality, and local government can start to review the Colombian VISA policy for those World citizens that want to visit and work in Colombia.

Brown, Matthew. 2004. “Esclavitud, castas y extranjeros en las guerras de Independencia de Colombia”. Revista Historia y Sociedad, No. 10, Universidad Nacional de Colombia.

Brown, Matthew. 2005. Militares extranjeros en la independencia de Colombia, nuevas perspectivas. Museo Nacional de Colombia.

Vila, Enriqueta. 1979. “Extranjeros en Cartagena (1595-1630)”. Jahrbuchfür Geschichte von Staat, Wirtschaft und Gesellschaft Lateinamerikas, Bd. 16, Colonia. Also, it can be read in: Vila, Enriqueta. 2001. Aspectos Sociales en América Colonial, de extranjeros, contrabando y esclavos. Editorial Universidad Jorge Tadeo Lozano.

The Nominal Exchange Rate issue and the Big Mac Index for Colombia

Economic globalisation brings that countries depend on Nominal Exchange Rate values for their economy development. In the last years this Nominal Exchange Rate in Colombia was revalued (Col$ per one dollar), but since the end of 2013 this Nominal Exchange rate has changed to be devalued. This information comes from Big Mac Index; this index is taken seriously in Colombia in order to take economic policies decisions. Although this Big Mac Index shows problems about labour cost adjustments, it makes its work. This note shows how this index is calculated and takes Colombia Big Mac Index as example.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: @Humberto_Bernal

It can be download @ PDF

The Big Mac Index is an easy way to check if the nominal exchange rate is revalued (appreciated) or devalued (depreciated). Although this index does not take into account the cost of living from each country, it is a good way to understand the theory of Purchasing Power Parity (PPP); the labour cost in each country is different, so the cost of living is different. In Colombia case this index is taking seriously for doing economic policies, so this note explain in detail how this index is calculated. 

Nominal vrs Real Exchange Rate 

Nominal Exchange Rate is the price of foreign currency in terms of local currency; for instance, in Colombia case this Nominal Exchange Rate is Col$1,983 per dollar in January of 2014; the capital letter that economic theory takes to represent the Nominal Exchange Rate is E. The Real Exchange Rate is the price (cost) of foreign goods in terms of local goods; for instance, the MacBook Pro computer real price (cost) is 25 barrels of colombian crude oil; this real Exchange rate can be represented by the lower letter e; moreover, it can be calculates as:

e = Ep* / p 

where E is the Nominal Exchange Rate; p* is the nominal price of foreign good; and p is the nominal price of local good.

The Exchange Rate under Purchasing Power Parity is related with one price for every good around the World, no matters the type of currency of each country; this exchange rate can be taken as the Nominal Exchange Rate that lets one price for a good around the World. Therefore, it means that a Big Mac hamburger in Colombia must have equal price as a Big Mac hamburger in States. In terms of above equation, we have a States Big Mac and Colombian Big Mac, but both hamburgers are the same; it means that their prices must have equal no matter the country where people stay. The equation related with this theory is:

1= Ep* / p

However, this equality is not held at all because of different labor costs in countries and Nominal Exchange Rate fluctuations. Therefore, the Exchange Rate under PPP calculated by the Economist researchers is that one that lets that this equality holds:

 E'= p / p*

Taking information from the Economist magazine, the Big Mac price in Colombia was Col$8,600 in January of 2014, and the Big Mac price in States was US$4.6 in January of 2014, so the Exchange Rate under PPP is:

E' = (8,600 / 4.6) = Col$1,870 per dollar

The Big Mac Index 

The Big Mac Index with above information gives information about the state of Nominal Exchange Rate compared with the Exchange Rate under PPP in percentage terms. The Big Mac Index formula is:

Big Mac Index =  
[(Exchange Rate under PPP - Nominal Exchange Rate) / Nominal Exchange Rate]*100

If this index is positive means that the Nominal Exchange Rate is revalued (appreciated); if it is negative means that Nominal Exchange Rate is devalued (depreciated); if it is zero means the right Nominal Exchange Rate.

The Big Mac Index for Colombia has shown years of negative values and years of positive values, but on this short time it appears that no converge to zero. The Big Mac Index for Colombia was negative between 2004 and 2006, so the Nominal Exchange Rate was devalued; nevertheless, it went to revalue state in 2007 and 2008. By 2013 and beginning of 2014, this index gave information that Colombian Nominal Exchange Rate was  devalued as figure 1 shows. As  one can see, it appears that there is not evidence of convergence to zero, but it is too soon to assert this statement because time data is too short still, there are 10 years for Colombia.

Figure 1. Big Mac Index Colombia 2004-2014

(Annual data)

Source: The Economist web page.

FDI in crude oil sector in Colombia: new evidence. Part II:1951-2013

When Colombians learned to produce crude oil in 1951, they decided to do it through government firm Ecopetrol and new types of contracts where foreign firms were welcome also. Through last half of XX century and the first years of XXI century, Colombia has changed her economic model to extract crude oil. These changes worked, but the terrorism, public corruption in royalties management and lack of discoveries have pushed down the crude oil sector. Nowadays, Colombia has crude oil reserves for next 6 years and in the best of the cases for next 10 years. These facts can be taken as the sunset of crude oil production in Colombia.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

After 1951 Colombia government decided to change the type of economic model for producing crude oil, but the result was negative in crude oil production. These changes started with government participation in crude oil production in De Mares concession through government firm Ecopetrol; moreover, the type of crude oil contract changed from concession to association in 1969; it means that government took part in all crude oil production that were run by foreign firms or local private firms. However, because of Colombia faced Balance of Payment crisis at the beginning of 50’s, local authorities decided to take control of exchange of rate in order to get foreign currencies to sort out this  crisis and government regulated the crude oil price in favour of getting  public revenues; therefore, foreign firms decided to reduce the FDI in crude oil sector in Colombia;  between 1958 and 1976 the outflows of FDI in crude oil sector in Colombia reached US$32 million (US$273.2 million in 2012 prices); moreover, the low price of crude oil before 1973 contributed to these outflows of FDI from Colombia.

Figure 1. International crude oil price

(WTI, US$ in prices of 2012)

Source: Historical Data British Petroleum.

The low FDI in crude oil sector that brought a high reduction in crude oil reserves between 1951 and 1976 pushed government to make deep changes in crude oil sector. The crude oil reserves in Colombia went from 1,196 million of barrels in 1951 to 472 million of barrels in 1976; this high reduction in reserves let government to change the policy of exchange rate from regulated to free, and trading the crude oil barrel according to international prices. Moreover, the volume of crude oil exported by Colombia was null between 1975 and 1985, so Colombia missed important revenues when crude oil price was high.

Figure 2. Crude oil exports fro Colombia

(Annual thousands of crude oil barrels)

Source: Central Bank of Colombia.

Because of policy changes in crude oil sector at the end of 70’s, the FDI into crude oil sector in Colombia increased and let improving crude oil reserves. After government  changed the crude oil economic policies, the FDI into crude oil sector went from negative  values (outflows) to an average of US$364 million per year between 1977 to 1998 (US$513 million of 2012). Between these years there were important discoveries such as Caño Limón Coveñas well in 1983, Cusiana well in 1989 and Cupiagua well in 1993; therefore, the crude oil reserves increased from 472 million of barrels in 1976 to 3,138 in 1994, and Colombia exported  crude oil again. 

After 1993 there were few discoveries that contributed marginally in increasing crude oil reserves in Colombia; it can be explained by high terrorism in Colombia and unfair contracts between government and foreign firms to produce crude oil. Although Colombia got important inflows of FDI between 1993 and 2003, the number of discoveries of crude oil wells were minimum; they were Volcanera y Pauto, Guando and Gibraltar wells. Terrorism in Colombia stared to blow up pipelines; for instance, the number of terrorist attacks (pipelines blown up) went from 65 in 1993 to 261 in 2001; these terrorism attacks could be explained because of society did not get social benefits from royalties from crude oil extraction; it means that royalties management has faced high corruption. Moreover, during 90’s Colombian government changed the taxes system for crude oil firms, and it was disappointed for international firms along the low international price.

The last period of crude oil in Colombia started at the end of 2003, and it can be taken as the sunset of crude oil production in Colombia. Crude oil production in Colombia tried to take off through a new type of contracts under concession type where government firm Ecopetrol was in the list to bid for crude oil areas; moreover security environment improved along better international prices. These facts let increasing the FDI into this sector in Colombia to reach an annual inflow of US$5,377 million in 2012. The foreign firms interested in Colombian crude oil are from the United States, the United Kingdom, Canada, China and India. However, the discoveries such as Rubiales, Pirí, Quifa, Sabanero and Akacías increased the crude oil reserves marginally; nowadays, the crude oil reserves are about 2,410 million of barrels and society faces high corruption in royalties management.

FDI in crude oil sector in Colombia: new evidence. Part I: 1894-1951

Crude oil and natural gas sector is a main economic sector in Colombia, so there is huge historical and financial work about it. This work has been dealt by researchers from local universities, government bodies and foreign researchers also. However, there is a topic on crude oil and natural gas that has not been dealt still;  it is the crude oil and natural gas perspective from Foreign Direct Investment view. Therefore, this note and my next weekly note will fill this gap. Contributions through this methodology is a complete data series of FDI in crude oil and natural gas sector in Colombia since 1894 and, in contradiction of previous works that point the FDI in crude oil sector as the main one through the first half of XX, I will point that this FDI shows cycles according to international economic scenario and local legislation. Of course FDI as stock in crude oil sector in Colombia reached 47.1% of total FDI as stock in 1928, but it was the peak of the first cycle. 

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download  @ PDF

Colombia is a small country that economically depends of commodities such as coffee beans, bananas, gold, silver, emeralds, flowers, coal, ferronickel and crude oil mainly; therefore, there are important works about these commodities. In crude oil and natural gas topic important researchers such as universities and government bodies have broadcasted historical and financial information about it. However, these works did not work this sector (crude oil and natural gas) from inflows of Foreign Direct Investment view, so there is a gap that this note and the next one will fill. The FDI in crude oil sector can be divided into three periods: from 1894 to 1950; from 1951 to 2002 and from 2003 to nowadays. This first note will work FDI in crude oil sector in Colombia from 1894 to 1950, and my next week note will work the next periods. I will take FDI in crude oil sector as FDI in both crude oil and natural gas sector; the natural gas investment took relevance since 1960.

The first period of these three is taken because the type of crude oil production was through concession type. The second one was through association between government and private firms; and the final one is  concession type where government firms can take part.

The first period of this FDI in crude oil sector in Colombia is interesting because Colombia did not have crude oil legislation until 1931, but the exploration started at the end of XIX century; moreover, production in high volumes started in 1921 and Colombia started to export this crude oil in 1926. Therefore, fields where crude oil was discovered were managed according to mining legislation and royalties were set up according each field before 1931. Other interesting issue is people use to say that FDI in crude oil sector through this first period was the main one as Twomey (2000) says Pag. 170, but it is not true at all; FDI as stock in crude oil sector in Colombia went from 0.2% of total FDI as stock in 1900 to 47.1% in 1928 and 32.4% in 1951; therefore, there were other activities that took foreigner firms attention such as gold and silver mines, bananas, coffee trade, beer, sugar, metallurgy, textiles, spirits and others consumption goods trade, hotels, banks and public services (public utilities).

Time Line for Foreign Direct Investment in Crude Oil in Colombia

The discovery of crude oil in Colombia comes back to XVI century when the Spanish conqueror Gonzalo Jiménez de Quesada reported that this black liquid was taken by indigenous for shielding their boats, as energy for their fires and as medical purposes. This black liquid was discovered in Middle Valley of Magdalena River and is was called the Infantas’ well. After this date, there were other discoveries such as the well that belonged to Colonel Drake Titusville; it was in middle of XIX century. There was other discovery in Barranquilla city in 1883 that was called Tubará; this project was supported by local and foreign firms through french Luis Striffler; this french had an interesting history in Colombia see Hombre Hicotea(1992) documentary; Turbará well had a productivity of 50 barrels per day as Asociación Americana de la Indistria del Petróleo(2013) says.

Figure 1. Foreign Direct Investment Inflows in Crude Oil and Natural Gas sector Colombia

(US$ million in 2012 prices)

The first FDI in crude oil registered was in 1894. At the end of XIX century (1880) Jorge Isaac the writer that wrote Maria novel had a crude oil concession in Urabá region (Atlantic Coast) that sold to american firm Panamerican Investment; this concession was sold to this american company in US$40 thousand in 1894 (US$1.1 million in 2012 prices). 

There were small investments before De Mares concession (Infantas well belonged to De Mares concession). At the beginning of XX century (1909) Colombia counted with her first crude oil refinery called Cartagena Oil Refining Co that refined 400 barrels of crude oil imported. By 1911, the Standard Oil from New York decided to do a join venture with Diego Martínez with a total investment of US$90 thousand (US$2.2 millions in 2012 prices). In 1914, this american company and Martínez decided to increase their investment to explore the Sinú region with US$750 thousand (US$17.1 million in 2012 prices); unfortunately their results were disappointed. The total FDI as stock in crude oil sector in Colombia was US$2.0 million in 1914 (US$46 million in 2012 prices) see Lewis (1938) and Ecopetrol (2011).

The beginning of important crude oil production in Colombia was after 1916 through two foreign firms mainly. The first one was the american Compañia de Petróleo de Colombia that arrived in 1917, and it made an investment of US$100 thousand in 1917 (US$1.8 million in 2012 prices); this company was known as Texaco-Mobile multinational years after. The other one was the american Tropical Oil that arrived in 1916. 

An important year for crude oil sector in Colombia was 1919. The concession called Concesión De Mares (Infantas’s well) was bought by three americans through Tropical Oil Company in US$1.5 millions (US$20 million in 2012 prices) and there was an important investment of US$1.0 million (US$13.3 million in 2012 prices) by the Andian National Corporation Limited from Canada to make a crude oil pipe to transport crude oil from Barrancabermenja region (where Concesión De Mares is located) to Cartagena port and to make a refinery in Barrancabermenja. It is import to highlight that the Tropical Oil was bought in US$100 million in 1920 (US$1,327 million in 2012 prices) by Standard Oil from New Jersey, but this transaction was between foreign people; therefore, this transaction can not be taken as FDI into Colombia; moreover, the Andian National Corporation from Canada was a branch of Standard Oil from New Jersey also; the Standard Oil from New Jersey broke their company in order to avoid legal issues that could bring more costs in Colombia. After many investments from americans, the total FDI as stock in crude oil sector in Colombia was US$ 20 million in 1919 (US$285 million in 2012 prices) see Lewis (1938) and Ecopetrol (2011).

After 1919 Colombia started her high production of crude oil. Colombia went from a production 50 barrels per day in 1883 to 200 in 1921 and 17.6 thousand in 1926; moreover, Colombia started to export crude oil in 1926 with a volume of 12.9 thousand of barrels per day see López et la (2012). To achieve this production the foreign firm International Petroleum Company that was the multinational that controlled the Tropical Oil, Andian National Corporation Limited from Canada and Standard Oil from New Jersey invested about US$35 million between 1920 to 1924 (US$470 million in 2012 prices); this investment went to produce crude oil, to transport it and to refine it; moreover in 1925 the Andian National Corporation Limited invested other US$15 million (US$196 million in 2012 prices) to complete the pipe line between Barrancabermeja and Mamonal (Cartagena). By 1929 the total FDI as stock in crude oil sector in Colombia was US$136 million (US$1,835 million in 2012 prices) see Lewis (1938) and Ecopetrol (2011).

Figure 2. Foreign Direct Investment Stock in Crude Oil and Natural Gas sector Colombia

(US$ million in 2012 prices)

Unfortunately, the economic crisis in 1929 and the Second World War brought a reduction of crude oil companies’s capital in Colombia; moreover, the flows of foreign capital in this sector was null until 1939. By 1935 the FDI as stock in crude oil sector in Colombia showed a reduction to reach US$126 million (US$1,668 million in 2012 prices) see Lewis (1938). This reduction was because of lower demand of crude oil and the average crude oil price showed a decline from US$1.6 per barrel between 1920 and 1929 (US$21.3 in 2012 prices) to US$1.0 per barrel between 1930 and 1939 (US$15.8 in 2012 prices).

Nonetheless, between 1940 and 1946 there was a huge FDI in crude oil sector in Colombia because of competition increased and the higher demand of crude oil by the United States and United Kingdom for their war machinery. As foreign firms from the United States, the United Kingdom and Germany realised that Colombia had important reserves of crude oil at the beginning of XX century, so they decided to come through few engineers to explore. However, from 35 firms that sent engineers between 1894 and 1930, there were three that got successful results. Some of these 35 foreign firms where Weetman Person, Shell and British Petroleum from the United Kingdom; Standard Oil and Texas Petroleum from the United States and few Germans that explored La Guajira and Urabá (Atlantic Coast) as Rippy (1976) and Ecopetrol (2011) pointed. The three foreign firms that got a success were Standard Oil and Texas Petroleum from the United Staes and Shell from the United Kingdom-Netherlands. The total FDI as inflow between 1940 and 1946 was US$66 million (US$847 million in 2012 prices); in terms of FDI as stock this volume was US$192 million between 1894 and 1946 (US$2,515 million in 2012 prices). Each of these three firms started to produce crude oil as follow: Standard Oil New Jersey through De Mares (Santander) concession in 1921; Standard Oil New York through Barco (Norte de Santander) concession in 1940; Shell through Yondó (Antioquia), Cantagallo (Bolívar) and El Difícil (Magdalena) concessions in 1941, 1943, 1943 respectively; and Texas Petroleum through Velásquez (Boyacá) concession in 1946.

The end of this first part of crude oil FDI shows a decline because of changing of crude oil legislation in Colombia. The main firm that produced crude oil in Colombia was Standard Oil from New Jersey with 75% of total production in 1950; moreover, the total reserves of crude oil in Colombia was 1,269 million of barrels in 1950, and most of them came from De Mares concession. However, this concession finished in 1951, and these reserves were taken by government firm called Ecopetrol; therefore the age of the government state as supplier of crude oil started. This government movement brought outflows of FDI in crude oil sector in Colombia; in 1950 and 1951 this sector faced an outflow of US$29 million each year (US$276 million in 2012 prices each year); therefore, the total FDI as stock in crude oil sector was US$134 million in 1951 (US$1,983 million).

Bibliography

Ecopetrol. 2011. Energía limpia para el futuro. Villegas Editores. Chapter 1, 2 and 3.

Lewis, C. 1938. American's Stake in International Investments. The Brookings Institution. Pag. 583 and forward.

López, E; Montes, E; and Collazos, M. 2012. La economía petrolera en Colombia Parte I. Banco de la República Colombia, documento de trabajo 692. Pag. 85.

Reppy, F. 1976. The Capitalists and Colombia. Arno press, New York. Pag. 249.

Towmey, M. 2000. A century of Foreign Investment in the third World, Routledge, London and New York. Pag. 170.

Data can be download at excel file.

Coca leaf crops sure legalisation in short or long run, meanwhile most of people pay unfair costs

Colombian government and many countries such as the United States are spending more economic resources each year to block the coca leaf production, but production is in the market after 40 years still. Moreover, there is a new way to produce coca leaf in Colombia; it is scattering in small areas of coca bushes around whole Colombia, so it is more difficult to detect the crops to eradicate them. I propose to change the traditional strategy against coca market through legalisation under better economic opportunities for coca farmers and better education about coca effects for whole population (producers and consumers); moreover, the production and distribution have to be managed as a monopoly by international organisation that takes into account royalties for countries that produce coca leaf.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Colombia is one of main suppliers of cocaine in the World along Peru and Bolivia. The total area of coca leaf crops from these three countries was 133.7 thousand of hectares in 2012 that means 408 thousand of tonnes of coca leaves, or 543 tonnes of pure cocaine in 2012. This 543 tonnes of pure coca can be taken as the total supply of pure coca from the World. It is right to point that Colombia is the country that has more harvests of coca leaf through year; Colombia shows in average 4 harvest of coca leaf through the year while Perú and Bolivia have lower productivity; this information takes Colombia as the main supplier of pure coca around the World with 309 tonnes in 2012, Perú with 175 and Bolivia with 59. In Colombia case, revenues from this activity are taken to afford illegal activities such as guerrillas (FARC and ELN), paramilitaries and other groups outside of the Law. Profits from coca production are huge and its production shows Economies of Scale! as my weekly note of 14 of July of 2013 pointed. Moreover, consumption of cocaine in excess bring health problems such as respiratory arrest, heart attacks and loss of control. However, cocaine is addictive, people sniff it, and most of people can drive it. 

Colombian government along many countries such as the United States and organisations such as United Nations work hard on reducing the production and consumption of this narcotic. This fight has taken economic resources from other activities such as health, education and infrastructure from many countries and from international organisations. In the case of Colombia and the United States (Plan Colombia, see my weekly note of 4 of March of 2012 for resource from Plan Colombia), these resources reached a total of US$5.2 billion in 2012 prices in 2001 and US$14.4 billions in 2012 as figure 1 shows (blue line). It other terms, these annual resources are 4.4% of Colombia Gross Domestic Product. The uses of these resources in Colombia brought down the pure cocaine production from 695 tonnes in 2001 to 309 in 2012 as figure 1 shows (red line), so they achieved their target. However, the fight against cocaine production has taken more than 40 years  (the production for exporting started in 1971 as my weekly note of February 17 of 2013 pointed), and every year this fight demand more money and it is more difficult to eradicate the coca leaves. Moreover, the blood because of this fight is huge, so Colombia has a Homicide Rate of 34 per thousand of inhabitants in 2012 and it was higher before this year!. This note shows that the new way of growing coca leaves is scattering the coca crops in small hectares, so it is difficult to detect them. Therefore, the fight has to be changed through better opportunities for farmers in education, public services such as drinking water and better income; moreover, through legalisation of production and consumption of cocaine under monopoly managed by international agency, and direct education in schools and universities for young where narcotics is the issue.

Figure 1. Defense spending and cocaine production in Colombia 2001-2012

(annual data, US$million in 2012 prices and metric tonnes)

Source: UNODC Colombia and own calculation.

The new way of growing coca leaves in Colombia 

The dispersion of coca leaf crops around Colombia has increased since 2001. According to United Nations, the number of municipalities in Colombia that grow coca leaf increased from 164 out of 1,123 in 2001 to 212 out of 1,123 in 2012; moreover, the number of coca leaf crops lower or equal of 3 hectares has increased  from 47,884 in 2004 to 52,189 in 2011. The GINI coefficient for coca leaf crops has shown a decline since 2001; it went from 0.806 in 2001 to 0.737 in 2012 as figure 2 shows; it means that there are more municipalities that grow coca leaves and hectares used in each municipality are small and better distributed between municipalities. This information lets conclude that coca leaf crops are spreading around Colombia, and it will be more difficult to eradicate it through direct fight.

Figure 2. GINI coefficient for coca crops in Colombia 2001-2012

(annual data)

Source: UNODC Colombia (UN) and own calculation Stata 12.1.

Figure 3. Municipalities with coca leaf crops in 2001

(% share of total hectares with coca leaf crops)

Total municipalities with coca leaf crops in 2001 = 164

Figure 4. Municipalities with coca leaf crops in 2012

(% share of total hectares with coca leaf crops)

Total municipalities with coca leaf crops in 2012 = 212

Label:

yellow, green and blue: percentage of coca leaf crops in each municipality.

Source: Own calculation with information from UNODC (UN).

How can humanity live with coca?

To live with coca, people such as producers and consumes have to be aware about coca effects, and better public services and better income distribution for frames have to be a global policy in order to reduce the dispersion of coca crops; moreover an international organisation has to manage the production and distribution for consumption of pure cocaine. People have to be aware about coca effects in people health; this information can take the producer out of illegal deals; however, this knowledge does not make sense if coca farmers have a low income. Through an econometric model that takes annual information from municipalities that produce and no produce coca leaves between 2006 and 2011, the result is as economic development (legal economic activity) increases in 1.0% in regions of coca production, the number of hectares of coca leaf per capita shows a reduction of 0.04%; moreover, as social programs through Sisbén methodology increase, these type of hectares per capita show a reduction of 0.16% as table 1 shows. There is other important variable that makes low production of coca leaves, and it is the reduction of displaced people or in other terms the end of internal war in Colombia. The impact of 1.0% of lower people displaced lets getting a reduction of coca hectares per capita in 0.23%. Government can work hard on these variables, and get important  results, but the production will be still; therefore, this strategy has to be complemented with legalisation and a monopoly control.

Table 1. Impact on hectare per capita of coca bushes 2006-2011

(annual data, random effects model)

Variable	Coefficient
Economic development	-0.04%
People displaced	0.23%
Poverty program (Sisbén)	-0.16%
Number of observations	905
Number of municipalities	243

Source: UNODC Colombia (UN) and own calculation Stata 12.1.

Bibliography

UNOCD (UN). 2013. Bolivia censo de cultivos de coca.

UNOCD (UN). 2001-2013. Colombia censo y monitoreo de cultivos de coca.

UNOCD (UN). 2001-2013. Colombia Estadísticas municipales censo 31 de diciembre.

UNOCD (UN). 2013. Perú monitoreo de cultivos de coca.

Data Can be download at:

Stata data

do file