In Costa Rica, the oil bill is considered a never-ending issue since, for many ones, it is the cause of affecting their pockets every day. Despite the fact that in the international market, oil prices in the United States have decreased from US$ 100 to US$ 40 in just a few months. However, in Costa Rica the reality is different.

The reduction in the price of crude oil is due to the drop in international prices, not to mention the lower use of fuels, because of the fact that the “El Niño” phenomenon has increased rainfall in sectors where the main hydroelectric plants of the country are located.

For this reason, and others more explained in depth later, the Costa Rican oil refiner (Recope) has reduced its purchase of dollars (US$) to the Central Bank, which keeps the exchange rate with downward pressures.

The increase in the international price of oil is already felt in the country, and if this trend continues, the Central Bank of Costa Rica (BCCR) estimates an effect on the exchange rate, local prices, and inflation expectations. For this reason, the entity made it clear that it will also adjust interest rates if you will.

“The sustained increase in the price of oil and fuels in the international market, as a result of the political tension in the Middle East, the fall of inventories in the United States and the impending trade war between China and the United States,  will influence the national market”,  explains Recope in the increase request.

What the experts say…

Ennio Rodríguez, president of the school of economic sciences, added to these factors the oil production fall in Venezuela so that there is no excess supply in the world and the negotiations of Russia with the Organization of Petroleum Exporting Countries (OPEC). Rodriguez explained that the United States could increase production but it will take time for what could be expected that prices continue to rise. He added that some analysts expect prices between US$ 90 and US$ 100 this new year.

Drilling platforms for oil

The first effect felt by Costa Ricans is the increase in fuel prices. Every 2nd Friday of the month, there is presented to the “Aresep” (regulatory authority for public services) the extraordinary cost studies that align the sale price with those changes in the international market, explained “Recope” in a written response. For this, the average prices of the 15 days prior to the presentation of the study are used. These increases hit the production costs of many companies that produce other goods and services.

Important input

According to a study conducted by the Central Bank in vital industries like transport, electricity, non-metallic minerals, glass, rice and cement, fuel is the most important input. In addition, fuel has a significant price in the consumer price index (CPI). Gasoline, for example, adds on 1.25% and diesel, 0.09%; the electric energy that partly uses fuel as an input, adds on 4.28%. The percentage in the CPI of 315 goods and services totals 100%. In turn, the consumer price index is used to define rates for other public services, the fuel tax, and salaries.

The Central Bank of Costa Rica

Eduardo Prado, general manager of the BCCR, explained that, if the bullishness of the market persist towards those prices it will generate an incremental direct effect on the demand for foreign exchange (payment of oil bills), and given the supply of foreign currency on the exchange rate, in the first 4 months of the year, the country has already spent 10% more foreign currency on fuel imports compared to the same quarter of the previous year.

“Imported inflation, which together with the transfer effect of possible increases in the exchange rate, would affect the increase of prices in local goods and the expectations of inflation in interest rates, if required, which would increase the cost of the public debt, including that of the Central Bank”, detailed Prado.

“Interest rates would rise given higher inflation expectations”, Ennio Rodriguez said. This situation is compounded by the fiscal pressure, which arises from the high and persistent government deficit (excess of expenses over income), together, in addition to the oil effect, and the impact on interest rates. It is a bad combination that seems will not go away.