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The Price of Oil
Francisco Aguirre, president of the National Assembly’s Economic, Production and Budget Committee, recently said “ Nicaragua could be heading for its worst economic depression in 70 years.” according to a recent article in the NicaTimes reported by Tim Rogers.
Citing terms such as, “grave, grim, tailspin, very, very critical, tragedy, and nightmare the article paints a portrait of Daniel Ortega as a president that is unwilling, or worse, unable to remedy Nicaragua’s growing economic decline.
Daniel Ortega and Iran
According to several sources, Daniel Ortega will be heading to Iran for meetings with President Mahmoud Ahmadinejad, to discuss debt forgiveness and Iran’s continued financial support. It is no surprise that Ortega’s developing alliance with Iran is prompting a “wait and see” attitude from the U.S. government and consequently sidelining investors’ confidence in Nicaraguan real estate.
Ortega and FARQ
Another dubious ally that Daniel Ortega seems to be cultivating is his association with FARQ, or, the Armed Revolutionary Forces of Columbia. Recent allegations that Ortega is sponsoring two terrorists and that he had supplied their guerrilla group with weapons, has many worried that Ortega’s past affiliations with the leftist violence is still an issue.
Nicaragua’s Food Crisis
Anti-Hunger demonstrations are capturing the headlines as reportedly over a thousand took part in the rally calling for a comprehensive program to deal with Nicaragua’s growing food shortage problem. On Sunday June 1st, participants in Matagalpa marched to bring attention to issue that has been worsened by the recent skyrocketing price of fuel.
Ortega’s Antagonism
Understandably Daniel Ortega is a polarizing figure. Animosity between the Sandinistas and other more conservative parties has been gaining traction since his election. However, Ortega must realize that his actions are not solely alienating the opposition, they now also threaten international investors pouring millions of dollars in to the country. Recent statements made by Ortega have only served to escalate the tension between these groups. Referring to western financial aid, Ortega recently rebuked, “the colonialist mentality” of countries that offer “conditional aid. There is no doubt that “loans” from the IMF and the World Bank and their Structural Adjustment Programs have hurt Nicaragua’s growth in the past. It is also arguably not constructive for Ortega to alienate foreign investors who are helping to develop Nicaragua’s principal future market, tourism.
Ethanol as Biofuel
Today’s production of corn in the US destined to become ethanol accounts for over 25 percent of the traditional food/feed crop. That shift over the last two years has caused a dangerous increase in the price of corn, negatively impacting the growing but still fragile economy in Nicaragua.
Food As Fuel
Since corn is now seen an alternative fuel source, the agricultural commodity is now economically linked to the price of crude oil.
- Barrel price in 2006 – $66.00
- Barrel price today – $129.00
- Projected year end price – $200.00
- Bushel of Corn in 2006 – $2.00
- Bushel of Corn Today – $6.00
- Projected year end price – $8.62
Due in part to the negative economic impact from U.S. subsidized corn imports and recent soaring prices in gasoline, Nicaragua is facing some serious food shortage problems.
How does this effect the poor in Nicaragua? There are two results that are predictable, the first is social unrest. The World Bank estimates 33 countries face social unrest because of soaring food and energy prices. As Bob Marley once sang, “A hungry mob is an angry mob.”
The other expected consequence is increased emigration to the U.S.. According to a report today on China Radio International,
- “63.3 percent of Nicaraguans are inclined to seek jobs in other countries, up from 55.5 percent at the end of 2007…”
- Of those intending to seek jobs abroad, 44.5 percent prefer the United States.
- About 42 percent of respondents said the main reason for seeking jobs abroad was the lack of jobs domestically, while 23.6 percent cited poverty as the cause and 17.1 percent said the rise in food prices was triggering the exodus.
Food that should feed people is being converted to satiate the worlds hunger for gasoline, that’s just wrong.
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Nicaragua Real Estate
Why invest in Nicaragua real estate, especially now? Here in the U.S. gas prices are crowding four dollars a gallon, the housing market is stalled in many key areas, and fear of a prolonged recession is becoming a reality. The US economy is definitely rattled. In a recent New Yorker article by Ian Buruma titled After America the author puts into words the fears on a lot of investors’ minds, he writes regarding this year’s meeting of world leaders in Davos, Switzerland,
“The first time I visited this august assemblage, around the turn of the century, the received opinion was that the United States was so far ahead of the rest of the world that no one could ever catch up. This year in Davos, America’s fall was on everyone’s lips.”
What “fall” means is up for speculation. However, it could be that now is the perfect time for US investors to seek investments that have future global potential for growth. While real estate investment in the U.S. is a can of worms, real estate investment in Nicaragua is continuing to grow. In a recent post, Mike Cobb, CEO of Gran Pacifica and Barry Dufresne, President of Stealth Financial Services on their Nicaraguan real estate investment new letter write,
“Although the flow from the US has slowed down considerably, investments from other nations in the region, Europe and Asia continue to be strong and new ventures are springing up around the country.”
The development of millions of new middle class wage earners in countries such as India, China, and Russia, is and will create immense amounts of disposable income. Some of this new income will be earmarked for tropical vacations. Many investors see the potential of Nicaragua’s pristine coasts as poised to become major new tropical tourist destinations. Now is not the time for savvy U.S. investors to get caught up in domestic fear by thinking inside the box, perhaps it’s time to think about investing outside the country, in Nicaragua.
Nicaragua could start drilling for oil off its Atlantic coast within four years, according to Prensa Latina. “Nicaragua legalized oil exploration in its Caribbean waters Wednesday and it will start exploiting a resource that might turn Nicaragua into a Central American exporter…”
Two concessions contracts were signed with MKJ Xploration, a U.S. company based in New Orleans. “U.S. enterprise MKJ president Eric Conrad said 48 precent of the extracted crude will remain in Nicaragua.” Which might suggest that Nicaragua could build a refinery?
“Signed by General Prosecutor Hernan Estrada, the agreement opens doors to a project that may produce incomes up to 20 billion dollars” according to the article.
This is good news for Nicaragua’s economy, its citizens and for international investors. Currently, Nicaragua imports a costly 80 to 100 percent of its oil and gas to meet the country’s energy demands. The signing of this agreement clears the way for creating desperately needed revenue for the struggling nation as well as energy independence from Venezuela and the Chavez administration.
Read this for some background on, Oil in Nicaragua.
