Studying recent trends in hydrocarbon and mineral commodity markets can help us to better understand the economic situation of Latin America and the Caribbean (LAC). Our recent publication Extractives in LAC: the Basics provides an overview of policy trends related to the role of extractives in the region.
Where to begin?
Latin America and the Caribbean has around 20% of the world’s conventional oil reserves, 4% of the gas reserves, and major deposits of copper, iron ore, silver, gold, zinc, coal, and other minerals critical to the global economy. The region also has sizable reserves of unconventional oil and gas. These natural riches make the region the world’s leading source of metals and the second most important source of oil.
Driven mainly by buoyant demand from developing economies, particularly China and India, the price of non-renewable commodities soared during the past decade. The region experienced a boom in investment and trade in natural resources. The extractives sector helped reap major economic benefits in resource-rich countries, enabling the development of basic infrastructure and social services in many communities. In 2013, fuels and mining products accounted for 40% of total South and Central American exports, compared to a global average of 22%. That year, the extractives sector contributed more than 15% to the GDP in resource-rich countries in the region.
Bust! The impact of lower prices and investment
Economic woes in developing nations and in Europe have sent commodity prices tumbling since 2011. In 2015, the price of nickel dropped by 38%, iron ore by 33%, and the international price of copper by 29%. In addition, the price of a barrel of oil decreased more than 40%, and natural gas fell 50%. In 2014, foreign investment to the region fell by 16%, with declines in Chile, Colombia, and Peru concentrated in the mining sector and similar repositioning in Argentina and Brazil’s hydrocarbon sector.
Figure 1: Commodity Prices (Index 2005=100)
Figure 2: Foreign Direct Investment in the Hydrocarbons and Minerals Sector
Source: Perry 2015, data from Banco de la República Colombia, Comité de Inversión Extranjera de Chile and Proinversión Perú
The contraction of the sector has affected windfall revenue flows and changed the fiscal stance of many governments. New conditions have unsettled alliances and agreements forged during the boom years, for example, as extractive companies reevaluate investment plans and expenditures.
Countries that rely on extractives are rethinking resource-based development strategies. They are exploring avenues to strengthen the governance of the primary sector, while being aware that institutions and regulations must adapt to pressing needs and new market conditions. They are prioritizing the adoption of transparency and anti-corruption initiatives, the improvement of mechanisms for social participation, and efforts to enhance governance capacity.
What then? Priorities and challenges for extractives in LAC
Natural resource sectors in the region vary based on the size of a country’s economy and itsexperience with mining and oil and gas development. The needs in terms of policy, institutional capacity (sector governance and safeguards), information, and other critical governance factors vary widely among ‘established’ extractive countries and ‘emerging’ extractive countries.
Actors that traditionally had limited clout and visibility –non-governmental organizations, private investment funds, and indigenous communities– are finding ways to more successfully shape practices and decisions. Stakeholders now engage at the local and international level, alongside governments, to develop common agendas and tools for sector governance. Solutions to the challenges that extractives face in the region cannot solely reflect the decisions of centralized decision-making entities.
Countries will need to find ways to create stewardship –a common ethos guiding responsible natural resource planning and management. Strategies to leverage the region’s extraordinary natural wealth must take into account the positive and negative impact of the extractive industry. Providing reliable data and a more stable and transparent dialogue mechanism will build trust and a sense of shared responsibility among parties. This will ultimately pave the way for the responsible and sustainable development of the region’s natural capital.