Colombia is unlikely to see a major economic windfall from higher oil prices as years of declining investment have reduced the sector’s role in public finances and growth. Investors remain cautious as policy signals, weak exploration activity and energy supply risks shape expectations for the country’s business climate, Marc Hofstetter, an economics professor at Universidad de los Andes, told BNamericas.
BNamericas: We have seen oil and gas prices rise due to the conflict in the Middle East. Given that Colombia remains a net oil exporter and that hydroelectric reservoirs are currently full, how protected is the country in the short term from this energy shock?
Hofstetter: Ten years ago, in the Colombian economy, this is the kind of situation we would have called a boom. Higher oil prices generally coincided with good times for the Colombian economy, and there were many channels through which that happened. One was higher investment in the oil sector, and foreign investment, for example, was largely concentrated there.
It also meant higher revenues for the state. At certain points, around 2014, up to 20% of the central government’s revenues depended directly or indirectly on the oil sector.
There were also positive effects for the regions, because in Colombia the exploitation of mineral resources generates royalties that are distributed to municipalities and departments. So it is not only the government’s fiscal situation that depends on this, but also the investment projects of regions, departments and municipalities, which are largely financed through royalties distributed across the country.
So 10 years ago we would have said that a situation like this was a stroke of good luck, an opportunity for those revenues to flow more generously. But I would say that, given the current state of the Colombian economy, it matters much less today.
Colombia’s oil production has fallen significantly, and investment in the sector has also declined sharply. As a result, the benefits in terms of revenues for the state and the regions will be much smaller than they would have been a few years ago. I would almost say we will barely notice them.
This is linked to what we might call the government’s approach to the energy transition, which has focused on shutting down mining production. It is not an energy transition centered on whether we consume a different energy mix.
Instead, the simplest route has been: do not produce oil, do not invest in oil, do not produce oil. And that approach has no environmental benefit, because what would reduce Colombia’s contribution to climate change is consuming less of these goods, not producing less, which is not the same thing.
But in a situation like the current one, that means the benefits of this, in quotation marks, stroke of good luck will be far more modest than they would have been a few years ago.
BNamericas: So the impact would not be enough to ease the country’s fiscal pressure?
Hofstetter: No, I do not think this will change the broader picture much. Let me give you a couple of numbers. Suppose oil prices rise by 20%. And assume that means all sector revenues also increase by 20%, including fiscal revenues and Ecopetrol’s profits and so on.
Just to give you an idea, the profits of Ecopetrol, the main state company, have fallen 75% over the past four years. So they are now about a quarter of what they were four years ago.
If you then add 20% to that quarter, you reach maybe 30% or 35% of what they once were. It is still very small. So no, without deeper policy changes this will not relieve the country’s fiscal situation at all.
BNamericas: Colombia’s central bank reported in early March that foreign investment fell by about 16% in 2025. Do you see this trend as structural and likely to persist in the long term, or could it reverse under a new administration? If so, what would need to happen for Colombia to recover that foreign investment momentum?
Hofstetter: Foreign investment, by definition, if it is foreign direct investment, is a long-term investment.
Without a radical change in discourse, the incentives for foreign investment are very limited. Let me give you an example. Last month there were floods in Colombia and the government declared an economic emergency to deal with them. Under an economic emergency, the government has the power to impose taxes that do not go through Congress and are collected only during the emergency.
The tax the government came up with was a tax on companies’ wealth. On their wealth, not their profits. Foreign direct investment means bringing capital to Colombia and planting it here. The signal is: if you bring foreign direct investment, I will skim it off through taxes declared under an economic emergency.
That is a terrible signal if you want to invite people to bring resources to Colombia to produce. So without a change in the approach toward what the private sector represents, I do not see those investment figures recovering.
BNamericas: Do you think oil activity in the country could pick up again, and do you think companies’ confidence could recover quickly?
Hofstetter: I am not sure how to answer that without getting into politics. That would be the answer without entering politics. Because the candidate leading the polls, whose main slogan is to continue the policies of this government, if those policies continue then the answer to your question is no.
That said, among the other candidates I do see a consensus on the importance of reviving the hydrocarbon sector in general. And in fact the notion that, amid so many problems, this could be low-hanging fruit.
Increasing revenue is not that difficult. Reducing public spending is very difficult. It has to be done, but it is tremendously challenging. I think it is easier to boost the oil sector, remove all the obstacles and taxes we have imposed on it and even reconsider the debate that Colombia abandoned about allowing fracking.
Those are low-hanging fruits where, within two or three years, you could see returns in terms of fiscal revenue and certainly in terms of income for the country. But if the person who comes to power wants business as usual, that will not happen.
And to complete the answer, even the Ecopetrol union, which used to be a very powerful union in Colombia, the USO, is not supporting the president’s candidate, even though it did in the last election. So I think there is already a growing awareness in that sphere that with this approach the company is not going anywhere.
BNamericas: On the energy front, although oil carries less weight in the economy than before, Colombia remains a net crude exporter and hydroelectric reservoirs are currently at high levels. In that context, how exposed is the country in the short term to a shock in international oil and gas prices?
Hofstetter: For electricity generation right now, with the good weather we have had and reservoirs full of water, that is not a concern. But there is a structural concern in Colombia. In recent months rainfall has been typical for Colombia, so this shock caught us well prepared.
But at this moment Colombia does not have enough energy if weather conditions are unfavorable, in terms of rainfall for its reservoirs. If things go badly, as they did in the past with a strong drought or a strong El Niño event, there is no way we could cover the energy Colombia needs.
In other words, the threat that electricity rationing might be necessary is there in the background. It has not happened because we have been lucky with the weather. If you add to that the possibility that fueling backup plants – gas, coal and others – becomes more expensive because of the conflict, that would be a very bad combination. But right now, fortunately, in that sense the weather has caught us at a good moment.
BNamericas: Finally, a broader macro question with a focus on investors. What changes or policies would be needed to restore confidence and attract new capital?
Hofstetter: I think there are some practical changes and some narrative changes, and the narrative is very important here. On the narrative side, there needs to be a different approach to what the business sector represents.
The current government’s narrative is that the business sector represents the country’s wealthy and that it is the group that must be squeezed to pay more taxes. Added to that – and this is the practical side – Colombia has a tax structure that is very unfriendly to business investment.
We have corporate income taxes of 35%, much higher than in the rest of the OECD and higher than in many Latin American countries And if you add to that the fact that, in addition to paying 35% on profits, companies face taxes such as the wealth tax, it becomes a fatal combination for investment.
So on the practical side, I think Colombia would need a credible path where individuals pay more taxes and companies pay less. And on the narrative side, an approach in which businesses are seen as partners of the state, not as enemies. That narrative is not winning for now.
BNamericas: Which sectors of the Colombian economy offer the best investment opportunities today and which face the greatest regulatory or policy risks?
Hofstetter: That is very difficult to answer. From a macro perspective one would say the bet should be on the services sector in general, including everything from finance to tourism. But it is difficult to see clear signals attracting that investment given recent developments.
If you look at the financial sector, which should be part of that engine today, we have been loading it with extra taxes that the rest of the corporate sector does not pay. Higher income taxes above the 35% rate, and in this latest round of wealth taxes there is an additional surcharge on the financial sector.
So again, a particular antipathy focused on that sector. And if you look at tourism, one would say it should be an important bet for Colombia.
We recently saw reports suggesting that about 100,000 tourism jobs were lost over the past year. Part of that has to do with the government’s labor reform and the increase in the minimum wage, which made formal hiring in that sector – heavily reliant on those types of workers – much more expensive.
And many formal jobs were lost. So I think the bet should be there, but again it depends on having a narrative that is more friendly to people doing well and businesses doing well, not one focused on punishing those who succeed.
(The original version of this article was written in Spanish)
