Editor’s Note: This is the final piece in a three-part series examining the impact of declining oil prices in Latin America. Click here to read part one and part two.

By Allison Fedirka

Summary Colombia, Ecuador and Venezuela are all currently experiencing some degree of social unrest due to low oil prices. In Colombia and Ecuador, policies introduced by the government to combat falling prices have been unfavorably received by the public. Meanwhile, in Venezuela, there is an extremely high level of unrest and dissatisfaction with the government. Low oil prices have completely destabilized the national economy and threaten the livelihoods of the general public. 
In the past two weeks, we have examined how major oil producing countries in Latin America have handled the decline in oil prices. As we saw in part one of this series, Mexico stands out as a country that has managed to financially confront lower oil prices while maintaining a stable political environment. In part two, we saw that low prices were not the root cause of the financial challenges facing the energy sector and public unrest in Brazil and Argentina. The last group of countries we will address are those that have encountered economic and political hardships as a direct result of low oil prices. Among the major regional producers, the countries that are facing social unrest due to low oil prices are those with the highest oil revenues as a share of GDP: Colombia, Ecuador and Venezuela. The effects of the social unrest vary, from reducing a government’s political capital and maneuverability to threatening the viability of the economy and government.

Colombia has experienced significant financial losses due to low oil prices, though the public demonstrations against the government have been mild. It has been estimated that for every dollar drop in the price per barrel of oil, Colombia loses $200 million in state revenue. The effects of low oil prices are particularly notable when looking at the country’s exports. Colombia’s exposure to export markets is relatively low and in 2014 exports only accounted for approximately 16 percent of GDP. However, prior to the drop in oil prices, oil accounted for just over half the value of Colombia’s exports. In 2015, oil exports dropped from $28.6 billion to $14.1 billion and became the primary driver behind the 34.9 percent decline in exports that year. In 2013, a year prior to the decline in oil prices, the Colombian economy brought in $23 billion worth of oil-driven revenue. This year, oil revenue is expected to total $1.5 billion to $3 billion.
The Colombian government has used several measures to help cope with the drop in oil prices. In 2014, when prices began to fall, the government raised taxes by 1.4 percent of GDP. It also adopted austerity measures in subsequent budgets with cuts equivalent to 1.2 percent of GDP. Earlier this month, Colombian President Juan Manuel Santos publically acknowledged that the government’s “intelligent austerity” policy consisted of very drastic cuts in anticipated revenue. In particular, he noted that in 2013, oil contributed about 20 percent of the state’s income. The 2016 budget has oil income at zero and an anticipated oil price of $50 per barrel. The government has also sold assets to gain revenue. The most publicized example of this was the sale of its 57.6 percent share in power generator Isagen for $1.99 billion. The money will be used to help ensure continued financing for fourth generation infrastructure projects.
Government austerity measures in response to lower oil prices have started to spark mild to moderate levels of social unrest in Colombia. For starters, oil workers have been direct casualties of lower oil prices. The Colombian Oil Association estimates that 20,000 jobs have been lost so far and more are possible. Workers have negatively responded to the government-decreed 7 percent wage increase for 2016, only just above the inflation rate, and the 10 percent unemployment rate. The most prominent example of unrest related to the fall in oil prices occurred on March 17, when labor unions, students, miners, truckers and farmers participated in nationwide protests against the government’s economic policies. While there were some clashes between protesters and police, these protests did not involve significant violence that threatened the security of the area or position of the government.

The Ecuadorian economy has been feeling the negative impacts, including social unrest, of low oil prices since early 2015. As of January 2016, Ecuador has had one drilling rig working, 14 fewer rigs than 12 months prior. Low oil prices mean it is not worthwhile to continue production when the break-even cost is about $39 per barrel. This is a significant development considering that the country is highly dependent on the industry. Oil rents account for 13.7 percent of Ecuador’s GDP and nearly half of the country’s total export revenue. Oil revenue has also played a key role in funding government expenditure, financing about one-third of the country’s budget and one-third of imported oil derivative products. Initially, the government predicted the Ecuadorian economy would grow about 4 percent in 2015. This figure was reduced multiple times throughout the year due to low oil prices. By the end of the year, the economy expanded a meager 0.3 percent and the International Monetary Fund’s latest 2016 forecast is that the economy will contract by 4.5 percent. The slower economy also contributed in part to a rise in unemployment. Though still at comparatively low levels for the region, unemployment increased to 5.7 percent in March, up almost 2 percent from the previous year.
The Ecuadorian government reacted almost immediately to combat low oil prices and started implementing a variety of tactics to mitigate the effects. In January 2015, the government lowered its budget expenses for the year by $1.4 billion, approximately 4 percent of GDP. The government cut $850 million from investment plans, while the remaining amount came from reducing government spending as well as delaying bonus payments and wage raises. The cut in public investments deterred economic growth, since public funding accounts for 52 percent of the country’s investment. At the same time, the government also slashed the budget’s anticipated price for oil from $79.70 to below $60. President Rafael Correa also imposed temporary tariffs on one-third of Ecuador’s imported goods. The tariffs range from 5 percent to 45 percent, apply to some 2,800 non-essential goods and are scheduled to be in place through mid-2016. It should also be noted that, in December 2015, the government made a $650 million foreign debt payment. This was the first time in Ecuador’s history that it repaid global bonds on time.
This year, in addition to cutting costs, the government has also pursued more creative tactics. First the government decided to pay three oil consortia to increase output in mature fields in exchange for a $1 billion investment from the consortia over the first five years of the deal. The government has also moved to promote and develop the country’s mining sector as a way to help offset its dependence on oil. Most recently, the government is seeking to adopt a law that allows it to increase or decrease income and expenses in the budget by 15 percent without having to consult with the National Assembly. Even with these measures, the government has struggled to meet its financial obligations. This is partly because these actions simply cannot keep up with the losses due to oil prices. In the past, Chinese loans have been Ecuador’s go-to option to fill budgetary gaps. While these funds are now harder to obtain, Ecuador is still pursuing Chinese loans.
Throughout 2015 and into 2016, Ecuador has seen regular, large-scale public demonstrations criticizing the Correa government. The population has historically been sharply divided on Correa’s policies. Controversial tax hikes to help compensate for lower oil revenue, as well as discussion of a constitutional amendment that would allow Correa to seek another term in 2017, spurred anti-government protests throughout 2015. The president’s approval ratings declined by 15 points in the first six months of last year. Ultimately, Correa supported a version of the amendment that would not allow him to hold office in 2017. However, public unrest has continued this year due to the economic policies the government has put in place to help recover some of the revenue lost to low oil prices. Labor unions, farmers and the affected middle class have held nationwide, anti-government marches in February, March and April. At the same time, Correa has been calling on his supporters to hold counter-protests in support of the government. With presidential elections less than a year away and Correa absent from the ballot, it is unlikely the government will be overthrown prior to the elections, as the opposition and those unhappy with the current economic policies will likely use the elections to gain and legitimize their power.

Low oil prices destroyed the Venezuelan government’s finances and left the economy in ruins. Venezuela’s economy contracted 10 percent last year. Oil revenue accounts for roughly 25 percent of the country’s GDP and 95 percent of its export revenue, leaving the economy very susceptible to any fluctuation in oil prices. A drop in prices means less financing for government programs that the country’s Chavista/popular-based government relies on for power. In 2014, Venezuela received $40 billion from oil income, but in 2015 this was reduced to $12 billion. Oil revenue supplies the government with 97 percent of its foreign currency inflow. The inflow of U.S. dollars is needed to pay for Venezuela’s imports. Given that Venezuela relies heavily on imports for its food supplies, fewer dollars mean fewer food imports, which helps explain why the country has faced scarcity issues.
While Venezuela has managed to hobble on this year, how the country plans to meet its financial obligations has become increasingly unclear. The break-even price for oil production is $17 to $18 per barrel. However, the government needs oil at $111 per barrel to be able to pay for all of its desired expenses. This price for oil appears unlikely in the short term and the Venezuelan government is well aware. The 2016 budget puts oil at $40 a barrel. Central Bank reserves are at $12.9 billion, leaving the government in a precarious situation. Economists and financial analysts are already speculating about the possibility of a default by the government or the state-owned oil company PDSVA later this year, when about $6 billion in debt payments are due.
The government has been making efforts to ensure it can meet its financial obligations. Negotiations with China for the restructuring of loans worth $5 billion are ongoing, as are attempts to slow or freeze global oil production. Additionally, the Central Bank of Venezuela is in the middle of finalizing a gold swap with Deutsche Bank. There are also talks underway with other international banks and investment funds for $5 billion in loans tied to a gold mining project in the country. The hope in both cases is to help improve the liquidity of Venezuela’s foreign reserves.
As a result of this financial crisis, social unrest has been rampant, from opposition politicians openly seeking to depose the president to local gangs and militants carrying out street justice. Food scarcity has been a major cause of the protests. Lack of oil revenue has also led to less government social spending, which has left portions of the population disgruntled. Since the drop in oil prices, the most violent anti-government protests occurred in February 2015. The promise of National Assembly elections in December 2015 caused the public to focus its energy on the elections rather than protests. While violence on the streets of Venezuela continues, the opposition has concentrated its efforts on overthrowing the Nicolás Maduro government through political means. The government-controlled Supreme Court has blocked attempts for an impeachment vote. Now, the opposition is in the middle of pursuing Maduro’s removal through a popular referendum. The promise of an institutional solution appears to have helped keep total anarchy at bay in Venezuela, but this situation will change if it appears legal and institutional means are failing.

Given that oil prices are unlikely to greatly rebound any time soon, we should not expect to see any dramatic recovery in these countries in the short term. The intensity of social unrest experienced in Colombia, Ecuador and Venezuela corresponds to their respective dependencies on oil revenue. The more significant oil revenue’s contribution to the economy, the more intense the social unrest. Colombia’s social unrest will not threaten the stability of the Santos government. The country’s economic measures create short-term tensions, but promise medium-term payoffs. There are also indicators that the economy still remains relatively active and attractive to investors. Colombia’s stock market rose 15 percent in the first quarter this year and foreign direct investment in March was $1.34 billion, the highest monthly total since last August and double February’s total.
In Ecuador, the economy’s performance will continue to decline due to low oil prices. For the opposition, the political benefits that come with obtaining power via elections just 10 months away will very likely outweigh the cons of removing Correa forcefully before the end of his term. Lastly, Venezuela will continue to be a battleground between the government and opposition figures seeking to depose it. As political and institutional roads to a solution diminish, there is a greater likelihood of violence emerging from the social unrest. Default this year may not be certain, but regardless, the economy will continue to degrade with high inflation, scarcity of goods and negative growth.

Allison Fedirka
Allison Fedirka is a senior analyst for Geopolitical Futures. In addition to writing analyses, she helps train new analysts, oversees the intellectual quality of analyst work and helps guide the forecasting process. Prior to joining Geopolitical Futures, Ms. Fedirka worked for Stratfor as a Latin America specialist and subsequently as the Latin America regional director. She lived in South America – primarily Argentina and Brazil – for more than seven years and, in addition to English, fluently speaks Spanish and Portuguese. Ms. Fedirka has a bachelor’s degree in Spanish and international studies from Washington University in St. Louis and a master’s degree in international relations and affairs from the University of Belgrano, Argentina. Her thesis was on Brazil and Angola and south-south cooperation.