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,

e-mail: zhumber@gmail.com

It can be download @ click

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.

China is pulling up the World GDP through her productivity, a case to replicate in developing economies

China is the main country which is pulling up the World GDP due to her productivity which takes attention of multinationals. The World economy has showed a decreasing growth due to weak financial system for ordinary people and a global economy where multinational can take advantages of information to develop ideas with their high volumes of paper money. China shows exponential growth in her exportations until point to overtake exports from the United  States, moreover this country has increased her uses of crude oil per capita, it means Chinese improve their manufacture system and they give more added value to World. China case is important to the World due to multinationals believe in her economy and they invest in this country. Developed and developing countries have to be aware of this case to replicate it, multinationals do not have to be afraid to invest in developing countries to improve social welfare through lower unemployment rate, nowadays multinationals can hire high skilled people and unskilled people in developing countries, this objective can bring reduction of poverty. The only movement that these multinationals have to do, it is to invest in developing countries and developed economies have to ensure their investments, at the end it is just paper money.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download @ click 

The World economic growth showed positive growth until 2009 when financial crisis struck the World economy with a World’s GDP decline in 2.2% as figure 1 shows (gray line). Moreover, World economic growth shows a decreasing trend since 1962 when it reached 4.4%, this decreasing trend is evidenced throughout the World GDP’s moving average (green line figure 1), taking a value of 3.9% in 1981 and 2.3% in 2011. This decline in economic growth can be explained by the openness of economies in a global scenario where information goes fast, population growth, weak and expensive financial system for  ordinary people, political issues and few global enterprises which do not pay attention to social welfare as employment rate as main issue.  

Figure 1. World GDP growth 1962 - 2011

(%)

*Moving average growth take into account 5 lags.

Source: World Bank Data.

Fortunately this World economic decline is offset by China growth.  China is divided into three main regions: China mainland; Hong Kong and Macao. These three economies have showed an important growth since 1981 when they shared around 2.1% of total World GDP as figure 2 shows, by 2011 they reached 14.7% of total World GDP where China mainland is the main economy that contributed. This figures are supported by China GDP growth that has been no less than 3.8% since 1981 (dashed line figure 2), it is important to highlight that China grew 9.2% in 2009 when main economies showed a negative growth. 

Figure 2. China contribution to World GDP 1981-2011 (%)

Source: World Bank Data.

China (all three) showed this growth due to multinationals find high standards in labor force, lower salaries and strategic geographical position. People from China shows an increasing productivity which is reflected in higher exports than the United States since 2007. Figure 3 shows the United States productivity related with China productivity (horizontal axes), as one can see, China productivity increased in the last eleven years related with the United States productivity, therefore China showed higher exports than USA (vertical axes, year is close to the point). This increasing productivity from people from China maybe improve more, China is importing more crude oil per capita than before. China imported 0.1 liters per capita of crude oil in 1966 and 1.2 liters per capita in 2011 as figure 4 shows, it means China is making finished products with high value added. On the other hand the United States shows a marginal reduction in crude oil per capita, by 1966 this country consumed 9.8 liters and this country showed a reduction to reach 9.6 in 2011, this information let reach two conclusions: first the United States is improving her uses of crude oil or the United States is getting a stationary productivity which means same products and a slow growth. 

Figure 3. USA and China relative exports and productivity 2001 - 2011

PPP: Power Parity Prices at 2005 prices.

Source: World Bank Data and  Trademap.

Figure 4. USA and China mainland crude oil consumption 1966-2011

(Liters per capita per day)

Source: World Bank Data and BP Statistical review 2012.

Diseconomies of scale in Colombia, the coffee market case. What can Colombia do to recover this market?

Colombia has a big problem in coffee supply due to diseconomies of scale (increasing average cost per ton of production). These diseconomies of scale come from the International Coffee Agreement broke down in 1989 that put the end to quotas and subsides which favored to Colombia; cocaine production and internally war conflict that bring internally displaced people that let less farmers for growing coffee; and old crops and old technology for growing coffee that pull up the average cost per ton. Government spends lot of resources to increase coffee supply, for example through government program called Stability Agreements for Coffee 2010-2015 where the spending was US$4.6 million at least in 2011and lot of credits through public banks and private banks, for instance Finagro, a government body, gave 11.057 credits evaluated in US$20.2 million at least in 2011. These public resources are welcome but they must be well target, it means Colombia must bring economies of scale to coffee supply to be competitive trough Free Trade Agreements. The other way around Colombia will carry on with a decreasing supply and missing world market. Colombia has to work hard in learning about coffee production through research and development, reducing displaced people that reached 102.9 thousands people in 2011 and through Land Law (Ley de Tierras) that gave almost million of hectares to displaced people between 2011 and 2012, this land has to come with agro-projects as coffee production. This weekly note shows these three facts that bring diseconomies of scale to coffee market, these facts are where privates and government should work on to recover the competitiveness. However a point in favor to this market is an inelastic demand of coffee evaluated in 0.16, fact that suppliers have to exploit.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download @ PDF

Colombia has showed difficulties in her coffee market in the last 20 years as figure 1 shows. Since 1991 Colombia reduced is volume of production due to three facts: The end of quotas and subsides in 1989 through International Coffee Agreement broke down; cocaine production and war conflict that brings internally displaced persons; and old crops and old technology to produce coffee. The end of quotas and subsides brought lower prices letting lower incomes to International Trading Firms and lower incomes to farmers. Nowadays (2011) Colombia has 58 International Trading Firms where Federación Nacional de Cafeteros shared with 21.9% of total volume exported in 2011; Louis Dreyfus Commodities Colombia Ltda shared with 10.9%; and Racafe y Cia shared with 9.6%. The first 10 International Trading Firms shared 81.8% of total volume exported in 2011. These firms do business with BB Coffee Company, Starbucks Coffee, Coca-Cola and many others. There were 553.5 thousands of farmers who grew coffee in Colombia in 2010-2011, this volume of people has not showed huge changes since 1991, therefore this sector is important to keep working farmers. By 2011 this volume of coffee farmers shared with 15.6% of total farmers employed in Colombia and 2.6% of total workers in Colombia. The end of this international agreement hurt in deep coffee’s supply chain but brought competition and fair prices around World. Colombians has to fit in these new environment through better technologies and fair  charges from International trading Firms. 

Figure 1. Coffee production 1960-2010 

(thousand of tons)

See PDF format for more figure details.
Source: National Bureau of Statistics (Agronet) and FAO.

Internally displaced people in Colombia was 121,335 at least in 1999 and 102,956 at least in 2011. The total internally displaced people are 3.9 millions at least until 2011. These displacement is due to internal war conflict. Colombia is on the top violent countries around the world with a homicide rate of 31 per 100,000 inhabitants in 2011, 305 kidnappings in 2011 and 84 attacks against crude oil pipelines in 2011. Cocaine production showed a decline trend since Plan Colombia started in 1996 (USA money transfers to reduce cocaine production) this plan transferred huge resources in 1999 and 2000 with a total of US$1.2 billon in these both years and total of US$7.2 billion between 1996 and 2012. Cocaine production used 63,762 hectares to grow cocaine in 2011. Unfortunately these statistics push down the coffee production, for instance from displaced people approximately 60.0% come from main regions where coffee is grown. Antioquia is one of the main regions that produces coffee as figure 2 shows, she shared with 15.0% of total land taken for coffee production in 2010, however this region faced 22,615 displaced people in 2010 and 18,612 in 2011 and there is an important land that is taken to grow cocaine, as figure 2 shows, Antioquia shared with 8.7% of total land taken for cocaine production in 2010. Antioquia is not the only one that faces this problem, other regions which were the most important in coffee production in 80’s face same situation. For instance, Cauca shared 7.4% of total land taken for coffee production but shared 9.6% of total land taken for cocaine production. Nariño, Norte de Santander, Cundinamarca and Valle del Cauca are regions in similar situation. Regions that are in the margin with strong probability to face coffee production problem are Huila with at least 3,125 displaced people in 2011, Tolima with 4,431 displaced people and Caldas with 114 displaced people. 

Figure 2. Land for growing cocaine and coffee in Colombia by main coffee regions in 2010

(% of total land taken to grow cocaine and coffee)

Total land for growing cocaine in 2010: 61,812 hectares.
Total land for growing coffee in 2010: 744,161 hectares.
Source: National Bureau of Statistics (Agronet) Coca survey 2011 United Nations.

This coffee problem is a national problem due to displaced people who migrate from legal activities as coffee production to illegal activities as cocaine production, moreover due to Law of Free Marker (the end of International Agreement highlighted above), Free Trade Agreements signed recently and  Europe crisis (mainly in Spain due to colombians relatives’ money transfer) facts that will bring more unemployment to Colombia from coffee market. The main coffee regions which can bring unemployment are Antioquia that showed a unemployment rate of 10.4% in 2011, Caldas  with 11.8%, Cauca with 11.3%, Huila with 7.9%, Quindio with 17.7%, Risaralda with 14.8% and Tolima with 17.2%. 

Coffee sector and diseconomies of scale, empirical evidence

Diseconomies of scale are those economic activities that face exponential cost as volume of production is increased, in other words the average cost (average cost per unit of production, in this case per ton of coffee) is increasing. Unfortunately this type of technologies bring high market price and it is difficult to be competitive in international markets. Coffee production in Colombia faces this technology of diseconomies of scale as table 1 shows. This table was build with information from 20 regions from Colombia that grow coffee. It shows that the technological coefficients from land and employees (red numbers) sum 1.0 or less under statistical hypothesis. It means, if more labor or/and land are added to increase production, the coffee activity will face a higher cost per thousand of ton of coffee produced, therefore coffee market is not competitive in international market. Moreover, this table shows that land taken for cocaine production push down or decline coffee production in 0.035% if land for cocaine production increase in 1.0%. This results are statistically significants.

Table 1. Diseconomies of scale for 20 regions which grow coffee in Colombia 2007 to 2010

(Model type: Panel Random Effects. Data in natural logarithms)

Technology for production   Ln [Volume]		Model with cocaine
Ln [Land in hectares]	0.892**** (0.080)	0.839**** (0.081)
Ln [Number of employees]	0.168*** (0.085)	0.215*** (0.084)
Ln [Land used in cocaine in hectares]		-0.035*** (0.016)
Constant	-0.608* (0.375)	-0.356* (0.373)
R2	0.97	0.97
Observations	79	79

**** P-value < 0.01; ***P-value < 0.05. (...) standard deviation.

Source: Own calculations. Stata 12.1.

  

A factor in favour of coffee market is its elastic of supply and its inelastic of demand. The first case, it means as price increase, then coffee supply will increase more than price does in percentage terms. The elasticity of supply for coffee in Colombia is estimated in 2.32, it means as price increases in 1.0%, then coffee supply will increase in 2.32%. Moreover, there are other factors that pull up coffee supply as exchange rate does, in this case as exchange rate increases (colombia currency devaluation) in 1.0% coffee supply will increase in 0.22%. Finally, crude oil price pushes coffee supply down, in this case as crude oil price (WTI) increases in 1.0%, then coffee supply will face a reduction of 0.93% as table 2 shows.  

A inelastic demand means as price increases, then people do not decline their demand too much. Coffee demand elasticity in Colombia is estimated in 0.16 as table 2 shows. This elasticity can be read as price increases in 1.0% coffee demand will face a decline in 0.16%, this decline is tiny and it is wanted by suppliers due to external shocks which pull up coffee price, it will not push down coffee demand in huge volume that takes suppliers out of market. There are other factors that increase coffee demand, for instance if World GDP increases in 1.0%, then colombian coffee demand will increase in 1.19%. Local coffee price will reduce coffee demand in 0.24% as it increases in 1.0%. The variable called Dummy 1976 shows the effectiveness of decisions from suppliers and government to improve local coffee productivity in 1976, this decisions started in 1970 and they showed results since 1976 to 1990, nowadays the problem pops up again. 

Table 2. Elasticities of supply and demand for coffee in Colombia 1961-2010

(model type 3SLS. Data in in natural logarithms)

Supply Ln [Volume]			Demand Ln [Volume]
Ln [Price]	2.32**** (0.089)		Ln [Price]	-0.16*** (0.089)
Ln [Crude oil price WTI]	-0.93**** (0.206)		Ln [Local price]	-0.24**** (0.024)
Ln [Exchange rate]	0.22*** (0.093)		Ln [GDP World]	1.19**** (0.048)
			Dummy 1976	0.62**** (0.141)
R2	0.99			0.99
Observations	50			50

**** P-value < 0.01; ***P-value < 0.05. (...) standard deviation.

Source: Own calculations. Stata 12.1.

Under conservative expectation of World GDP growth of 0.7%, crude oil price of US$85 per barrel, a local exchange rate appreciation (less local currency per dollar) of 5.4% and coffee local price increase of 3.1%, then expected coffee supply and demand curves are showed in figure 3. The inelastic of demand and elasticity of supply are highlighted in this figure (more vertical and more horizontal curves respectively), these curves are drawn under statistical significance and they come from table 2. These expectations let making forecasts on coffee volume and its price, therefore Colombia is expected to produce 10,993 thousand sacks of 60kg per year between 2012 and 2014 (659.6 thousands of tons) and the expected international coffee price is US$1.62 per pound. Under this statistical data, the volume forecasted can be reached by local coffee market. Nevertheless, Colombia does not show  economies of scale in coffee supply as it was pointed out above. The global trend is lower prices as times goes forward and higher volume also, it means economies of scale in coffee supply in other countries, Colombia has to work hard to reach this scale of economies throughout government and private programs as Acuerdo para la Prosperidad Cafetera 2010-2015 (government program called Stability Agreements for Coffee).

Figure 3. Expected supply and demand curves for coffee in Colombia 2012-2014

(data in natural logarithms)

See PDF format for more figure details.

Source: Own calculations. Stata 12.1.

Economies of scale in soft drink market in Colombia. An advantage to be competitive through FTA

Colombia is getting more global in both ways exporting and importing good and services, therefore her industry has to reach foreign markets through headquarters in Colombia and factories abroad or exporting local products. If Colombia has economies of scale, her citizens must take advantages on them. Empirical evidence shows that Colombia faces economies of scale into soft drinks market, the average cost (average cost per unit of production) is lower as volume of production increase. This kind of technology is desired by society due to financial profits are higher  and suppliers can invest into science and technology, social programs to improve social welfare and promote culture as musicians and athletes. It must be highlighted, increase financial profits as a final target is not the objective, the objective is to increase financial profits to reach a better society.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @

Colombia is increasing her Free Trade Agreements (FTA), some of them are with EFTA, Canada, Chile, Mexico, El Salvador, Guatemala, Honduras and the United States of America. Some people point out that Colombia is not ready to be competitive as above countries are. This assertion could be true but it can be false either. The most important is to search for economies of scale that the country can exploit when a country signs a FTA. It means that in high volume of production, the average cost (average cost per unit of production) shows a reduction. I did my homework and found that soft drinks market in Colombia has this type of economy of scale. From official data, I got interesting results. Soft drinks in Colombia contains production bottles of water, bottles of juice, sodas as Coca-Cola and Pepsi, it does not contents spirits and alcoholic drinks. There are 25 firms of soft drinks in Colombia in 2011 which give financial information but one can count approximately 79 according to 2010-2011 industrial census. The most important firms are Industria Nacional de Gaseosas S.A. (Coca-Cola) with 36.2% of total sales in 2011; Gaseosas Posada Tobon S.A with 17.9% of total sales; and Gaseosas Lux S.A with 9.6% of total sales. Coca-Cola is a foreign firm and the others are mainly locals.

Figure 1. Firms and employees in soft drinks market in Colombia 1992-2010

(natural logarithm scale)

Source: own calculations with local bureau of statistics' data.

Colombia can take this advantage of economies of scale in  soft drinks market and export them to Mexico, Honduras, El Salvador and other countries in the Caribbean. Figure 1 shows how technological change took place in this economic sector, there were less firms in 1992-1999 than 2000-2010 and more employees working in 1992-1999 than 2000 to 2010, therefore this sector faced a positive technological change form 1992-1999 to 2000-2010. This technological change gave as a result a lower average cost, this fact is highlighted in microeconomic textbooks when market shows economies of scale. Figure 2 shows empirical evidence for soft drinks market in Colombia, there is a decreasing relation  and negative slope between volume produced (million of liters) and average cost index. The average cost index is equal to total employees divided by total production. From figure 2 one can point out that as production increase the average cost shows a decline. This kind of technology is desired by any supplier in any market due to as volume increase, it is cheaper produce the latest unit (in this case the latest million of liters). Moreover the supplier’s target should be the market demand but to reach it, she has to play into a monopolistic competition game (to make product differentiation as marketing target) .

Figure 2. Decreasing Average Cost in soft drinks market in Colombia 1992-2010

Source: own calculations with local bureau of statistics' data. 

Soft drinks profits are high in Colombia. For instance Industria Nacional de Gaseosas S.A. (Coca-Cola) showed US$414 million profits before taxes (operating profits) in 2011 and the total soft drinks market showed US$1,4 billions (nine zeros) operating profits in 2011. The relation between operating income and operating costs is showed in table 1. This relation can be read as an increment of 1.0% in operating cost, the operating income is expected to increase in 0,8% and if the inflation shows an increase of 1 (for instance from 3.0% to 4.0%), it is expected that operating income shows a decline in 0.9% (0.009*100).  This model is significative through statistical tools. As a citizen, one waits too much from these sectors that have economies of scale, their target has to be increasing profits to reach a better social welfare. Increasing profits for making more financial profits as a target is not the solution for economic problem.

Table 1. Relation between operating income and operating cost for soft drinks market in Colombia 1995-2010

(Random effect model)

variable	Coefficients
Ln(Operating costs)	0.805
Inflation	-0.009
Constant	3.689
Observations	466
Hausman test (probability)	0.0206

Source: own calculations, Stata 12.1.

Minerals’GDP in Colombia, crude oil sector the main one

Colombia minerals’ GDP showed an increase as a share of total GDP. This share went from 5.5% in 2000 to 7.9% in 2010. The main minerals that took room in minerals’ GDP as whole were crude oil with 66.5% in 2010, coal with 19.7%, gold with 4.6% and natural gas with 2.9%.  Although these minerals contribute marginally in total GDP, when Colombia run out of them ,there will be a high social costs in terms of unemployment. For crude oil this cost will be around 14 thousand places accounted in 2012 and for whole sector will be 283 thousands, of course the short run problem is crude oil scenario, for the others minerals we have enough reserves still. 

Author: Humberto Bernal,  

Economist

e-mail: zhumber@gmail.com

It can be download @

Colombia Gross Domestic Product (GDP) reached US$286.5 billions (nine zeros after point) in 2010 at current exchange rate. It meant a GDP per capita of US$6.366,68 in 2010. Recently there have had lot of attention about how minerals contribute to GDP in Colombia. Figure 1 shows how minerals’ GDP is distributed. Left axes shows GDP for each mineral as a percentage of total minerals’ GDP. For instance Coal’s GDP showed a share of 13.3% in total minerals’ GDP in 2000, crude oil’s GDP shared with 73.1% of total minerals’ GDP in 2000, gold’s GDP shared with 3.6% and natural gas shared with 3.4%. This statistics showed a marginal change last ten years, coal’s GDP increased to reach 19.9%, crude oil’s GDP decreased to reach 66.5%, gold’s GDP increased to reach 4.6% and natural gas’ GDP decreased to reach 2.9%. 

The right axes shows how much minerals’ GDP shared in total GDP in Colombia. These seven minerals shared with 5.5% in 2000 and 7.9% in 2010, therefore minerals are getting room in total GDP in Colombia.  As I pointed weeks before, minerals’ GDP is marginal in the total GDP but these seven sectors give work to 283 thousand people, therefore colombian government have to be aware when they run out, there will be a high social cost evaluated in unemployment mainly. 

This type of figures are interested due to one can get how much of each mineral sector contributes to total GDP. For instance coal’s GDP shared with 1.55% of total GDP in Colombia in 2010, to make this calculation one has to multiply 0.197*0.079*100 and it is done. For crude oil’s GDP this share was 5.26%, gold’s GDP shared with 0.37% and natural gas’ GDP shared with 0.23%.

Figure 1. Minerals’ GDP in Colombia by main component

2000 - 2011

(percentage %)

Left: Minerals’ GDP by component as a share of total minerals’s GDP (%).

Right: Total minerals’ GDP as a share of total GDP in Colombia (%).

Source: Bureau of statistics and own calculations.

Private firms , government and society business due to Crude oil and natural gas’ exploration, production and transportation. Colombia case

Colombia has crude oil and natural gas to improve society welfare.This activity takes attention of  private firms  (locals and foreigns) due to high profits, it takes public servants’ attention due to possibility to do corruption with public resources and it takes attention of regular citizens due to a rich country does not have Metro lines and fair health system. This note shows the benefits from first two bodies (firms and government) and how government (government as central, regions and municipalities) can improve their revenues due to a better crude oil transport. Cenit, the new government body has lot of work to do to reach better revenues from crude oil transport. Colombia showed backward motion in this activity, by 2000 crude oil transport gave to government 15.8% of total crude oil revenues and 5.7% in 2011. The new Cenit has to work hart in giving results about environmental cost due to crude oil transport and she has to set up legislation that takes into account this cost. Moreover, this note shows the relevance of crude oil revenues to government, it reached 16.4% of total government income in 2011.

Author: Humberto Bernal,  

Economist

e-mail: zhumber@gmail.com

It can be download @

Colombia has crude oil and natural gas to make business with locals and foreigns firms. It is a fantastic business to private agents and local government but this business gives few added value to whole society as this note highlight. The value added of Crude Oil and Natural Gas Exploration and Production shared just 6.2% of total GDP in Colombia in 2010 as figure 1 shows (green line, right axis), moreover this percentage showed a increasing trend since 2000, it means these activities contribute a bit more to Colombia development but it is still lower than other activities as manufacture sector. The most important contribution is through foreign currencies for colombian government through trading these products abroad and when foreign firms pay taxes and production costs. From Crude Oil and Natural Gas Exploration and Production’s GDP, one can divide it into its own components, most of this GDP is due to crude oil production as figure 1 shows (bars, left axis). By 2010, crude oil production GDP shared 89.2% of Crude Oil and Natural Gas Exploration and Production GDP, this percentage has showed low variation since 2000 when it reached 93.9%. Exploration and natural gas activities shared few of this added value, it is right to point out that almost all natural gas is traded inside country to home uses and as a car’s gas.

Figure 1. GDP crude oil and natural gas distributed according to activity and as a share of total GDP in Colombia 2000 -2010 (%)

Left: Crude Oil and Natural Gas GDP according to its activities. (%).

Right: Crude Oil and Natural Gas GDP as a share of total GDP. (%). 

Source: CEntral Bank, Ecopetrol, DANE, DNP, UPME, Ministerio de Minas y Energía (They are official government (bodies).

The crude oil’s business is showed in figure 2. One can divide crude oil revenues according to main ends. From 100% of total revenue (as example, WTI price, US$95.1 per barrel in 2011), exploration cost was 1.6% of total revenue (WTI price as example); labor cost was 6.5%; royalties, taxes, government assignment rights were 39.4%; transport cost by pipeline was 5.7%; transport tax by pipeline was 0.1%; CIF cost was 10%, this CIF charge is the maximum, therefore it can be less; and capital and profits remuneration were 36.6%. These percentages did not show important changes as figure 2 shows but one has to recognize that the government’s revenues showed an increase, for example royalties, taxes and government assignment rights went from 22.2% in 2000 to 39.4% in 2011, this fact is due to higher crude oil prices and the new contracting scheme under Concession Contracts. However one must be highly critical to transport business, this activity shows a lower percentage as years pass (the green and purple areas figure 2), what sad, there are lot of pipelines through whole Colombia and the environment cost due to their building is high. One of main conclusion is highlight the work that the new government  body called Cenit has to do. Cenit has to improve crude oil transportation and get more percentage from crude oil revenues, the expectation is to increase its percentage from 5.7% in 2011 as figure 2 shows to 15.8%, as it was in 2000. Cenit must start to work hard in a real environment valuation due to pipelines buildings and be aware of market demand and supply of crude oil transport, Venezuela is a big market which needs to supply crude oil to Asia.

Figure 2. Crude oil barrel distribution in Colombia 2000 -2011 (%)

Source: CEntral Bank, Ecopetrol, DANE, DNP, UPME, Ministerio de Minas y Energía (They are official government (bodies).

Colombian government should be happy about revenues from crude oil activity but society is sad due to government revenues management. Revenues from crude oil activity showed an increase trend, this revenues shared 6.8% of total government revenues in 2000 and 16.4% in 2010, it is mainly due to higher prices and the new contracting scheme which was set up in 2003.  However, Colombia society is paying a high cost due to government corruption and lack of public resource management. Colombia faces lack of infrastructure as Metro lines, she faces poor in health system and lack of security due violence and narcotic dealers in Cauca, Chocó and  Antioquia , they are the main coast border lines in Colombia. 

Government revenues due to crude oil activity as share of total government revenues* ** 2000 -2011 (%)

*Government bodies accounted: central, regions and  municipalities.

**It takes into account all taxes, government right and royalties.

Source: CEntral Bank, Ecopetrol, DANE, DNP, UPME, Ministerio de Minas y Energía (They are official government (bodies).https://docs.google.com/open?id=0BzkhS13UydIHZWlaQmhPYXlvdVk