Colombian government and private firms broadcast biased information about crude oil price decline. They broadcast the government income reduction because of lower royalties, lower utilities from Ecopetrol (petroleum government-private firm) and lower make value of petroleum firms. Public opinion needs to know the benefits from this reduction. These benefits are lower final good prices and lower exchange rate in the long run (after 9-12 months from negative shock on crude oil price). Therefore, government has to work on meeting these benefits as soon as possible to take advantage of this crude oil price decline. The fist step is to regulate the gasoline price for load transportation such as public transport and trucks; moreover, they have to increase taxes for familiar cars to regulate cars' pollution.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
This note deals with crude oil price decline and its impact on nominal prices in Colombia. There is a biased talking about the impact on economic growth and economic development because of crude oil price decline in the last nine months. This talking points that crude oil price decline comes with costs in terms of lower government income, higher exchange rate (Col$xxx per US$1.00) and petroleum companies lower market value. However, it is a part of this debate, so crude oil price decline will bring a reduction on final goods prices also, and it means better social welfare.
To point this long run benefit, I take a time series model called VEC that takes into account Crude Oil Price (WTI), Colombia Consumers Price Index (Col_CPI); Colombian Whole Price Index (Col_WPI), Colombian Nominal Exchange Rate (Col_ER) and the Unites States Consumer Price Index (USA_CPI). These five variables come in monthly span since January of 1986 to December of 2014; moreover, they are lagging 12 months each one to get seasonally effects. This model is robust in statistical terms.
Results from this model goes with social welfare after the shock. Through impulse response analysis, results show that first 9-12 months after negative shock (-1.0% decline on crude oil price), the Colombian CPI increases; however, after these 9-12 months, Colombia CPI shows a decline; therefore, it means final consumers will enjoy a higher power of purchasing. The Colombia Nominal Exchange Rate will increase (Colombian peso will face a devaluation against dollar) the first 9-12 months, but it will decline after this period, then it will converge to the long run level without any change. The Colombia Whole Price Index will show a decline. Finally, the Unites States Consumer Price Index will face a decline also as figure shows.
In conclusion. Government economic authorities and private research firms in Colombia are broadcasting partial information about the effect of crude oil price decline. Of course, there are costs as they point through reduction of government income and petroleum firms market value. However, these people do not talk about benefits, and this document points them, so Colombia CPI, WPI and Nominal Exchange Rate will show a decline after 9 - 12 moths from initial negative shock on crude oil price. It means that Nominal Exchange Rate short run movements are transitory (speculation), so after 9 months the Colombian Nominal Exchange Rate will come back to its long run equilibrium; nonetheless, it can spent more time to get its long run value again due to negative shock is not transitory, it is permanent in the last 9 months, but prices will decline by sure in the next months if government works on gasoline price.
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