Q COSTARICA — Thanks to a domino effect starting with fuel prices, the cost of living for Costa Ricans is expected to increase in the coming weeks due to the conflict between the United States, Israel, and Iran.
Economic experts and business leaders are warning of a surge in international crude oil prices and, consequently, a direct impact on the economy.
In fact, since the start of the conflict, the price of a barrel of WTI crude, which serves as a benchmark for the national economy, rose from US$67.02 to US$96.75 last Friday.
Reduced economic growth, more expensive imported goods, and an increase in the dollar exchange rate are among the other potential consequences.
Furthermore, the Costa Rican government is expected to face higher interest rates to service its foreign debt, and therefore, the Central Bank is anticipated to be more cautious with its Monetary Policy Rate.
And indeed, aside from the geopolitical tensions, our country will be indirectly drawn into the armed conflict.
According to Costa Rica’s refinery that refines nothing, RECOPE, the conflict in the Middle East would cause “a moderate, almost immediate increase in the price of regular gasoline, diesel, and gas; while premium gasoline would decrease slightly.”
Indeed, according to preliminary data submitted by Recope to ARESEP last Friday, March 13, the price of a liter of premium gasoline would drop to ¢632 (-¢1), while regular gasoline would rise to ¢628 (+¢21), diesel to ¢565 (+¢35), and a 25-pound cylinder of gas would reach ¢6,834 (+¢81). These results reflect the behavior of the international hydrocarbon market between February 13 and March 12.
Domino Effect
In the case of Costa Rica, explains José Francisco Pacheco of the College of Economic Sciences, the most immediate transmission channel would be the increase in the price of oil, which is a cross-cutting input for practically all productive activities.
“Recent data indicate that the price of oil registered an increase of approximately 19.3% between the end of February and the beginning of March, which could eventually be passed on to the cost of the hydrocarbon ‘cocktail’ that the country imports. According to estimates cited in the analysis, a 10% increase in fuel prices could generate approximately 0.5 additional percentage points of inflation and reduce GDP growth by approximately one percentage point,” said Pacheco.
Although Costa Rica is not directly involved in the conflict, the effects are transmitted mainly through the increased cost of energy and international logistics, and this can impact domestic prices, economic growth, and investment decisions, Pacheco adds.
And the dollar?
In the case of the dollar, it’s important to understand that an increase in the price of oil would increase Recope’s demand for this currency to finance more expensive imports, and consequently, the dollar’s value would be expected to rise.
This wouldn’t necessarily be bad for the productive sectors, which have been complaining for years about an unrealistic appreciation of the colón against the dollar, so an upward surge would help them recover ground.
Meanwhile, Rodney Salazar, president of the Costa Rican Chamber of Foreign Trade (Crecex), warned of the complications for exporters, especially now that Iran is boycotting trade in the Strait of Hormuz.
This is one of the main strategic points for global energy trade. Around 20.9 million barrels of oil pass through this waterway daily, equivalent to about 20% of global consumption of liquid petroleum products and a significant proportion of maritime trade in liquefied natural gas (LNG).
“Any disruption to its operations has an almost immediate impact on international oil and gas prices and the costs associated with maritime transport. In recent days, incidents have been reported that have increased operational risk in the area, leading to adjustments in insurance premiums, the application of war risk surcharges, and changes in shipping routes,” Salazar explained.