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Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Colombia’s Economic Woes Worsen As Cocaine Prices Plunge

  • Cocaine, a significant part of Colombia's economy, is seeing falling prices, leading to economic instability and increased violence as illicit groups clash for control.
  • The falling prices are causing economic hardship in rural areas where communities rely heavily on coca cultivation, creating an environment akin to Dutch Disease, where other industries are negatively affected due to an over-reliance on a single resource.
  • The economic hardship caused by falling prices of coca leaf and paste is leading to increased recruitment into illegal armed groups, rise in other illegal activities, and a mass exodus of people from rural regions.

Surging cocaine production, which hit yet another annual record during 2021, makes Colombia the world’s top supplier of the illicit narcotic. The vast profits generated by cocaine are a primary driver of Colombia’s decades-long multiparty low-level asymmetric conflict, which has claimed at least 450,000 lives. Since 2018, as cocaine production soared, violence across the Andean country surged, deterring foreign investment and impacting the economy, including the beaten-down oil industry, which has operations located in key coca cultivating areas. The economic dependence on cocaine production in parts of rural Colombia has seen the emergence of a perilous economic phenomenon known as Dutch Disease.

The arrival of cocaine trafficking during the late 1970s and the vast profits it generated was responsible for Colombia’s simmering civil conflict escalating. The scale of those profits is evident from the early 1980s cocaine was accounting for seven percent of Colombia’s gross domestic product (GDP) and 70% of exports by value. Those immense profits allowed the myriad of illegal armed groups in Colombia to acquire modern military-grade weaponry, expand recruitment and brazenly challenge the state. This saw an escalation in violence, including massacres, as armed bands ranging from leftist guerillas, drug cartels and paramilitaries clashed with each other and the Colombian government. 

After decades of conflict President Uribe, in office from 2002 to 2010, with the aid of the Clinton administration’s multibillion-dollar Plan Colombia package, regained control of Colombia’s major cities and large swathes of the countryside. That military campaign, which primarily focused on combating the Revolutionary Armed Forces of Colombia (FARC), the largest illegal armed group in the country, culminated with hope for a period of peace. Uribe’s successor President Juan Manuel Santos, secured a 2016 peace deal with the FARC which by late-2017 saw nearly all of the leftist guerillas demobilized, with less than 1,000 dissidents rejecting the agreement. This, it was believed, would bring an end to Colombia’s long-running civil conflict and deliver an economic windfall for the war-weary country.

That simply failed to occur. By October 2022, it was estimated by various humanitarian groups operating in Colombia that the number of FARC dissidents had exploded to potentially as many as 5,200 members of various splinter groups. That was responsible for fueling a surge in violence as various illegal armed bands clashed for control of Colombia’s illicit economy, notably cocaine trafficking. This surge in the volume of combatants can be attributed to a series of events, key among them being President Ivan Duque’s, in office from 2018 to 2022, failure to fully implement the FARC peace accord. Along with rising rural insecurity, soaring poverty and greater socioeconomic inequality, that created fertile ground for the recruitment of new members and incentivized former combatants to return to arms.

Those bands are engaged in a range of illicit activities to fund their operations, including extortion, petroleum theft, illegal gold mining, coca cropping and cocaine production. The growing number of illegal armed groups and the swelling volume of combatants is the primary driver of soaring cocaine production. During October 2022, the United Nations Office on Drugs and Crime (UNODC), reported that Colombia’s coca crop hit an all-time high with 504,000 acres under cultivation for 2021, a notable 46% increase over 2020.

The international government body believes that acreage produced 1.1 million metric tons of coca leaf, which was 14% higher than 2020’s record of 997,300 metric tons. That volume of coca leaf had the potential to produce 1,400 metric tons of cocaine hydrochloride, which is a 14% greater than the estimated 1,228 metric tons manufactured a year earlier.

The immense profitability of cocaine and the growing strength of various illegal armed bands has seen large parts of rural Colombia turn to cultivating coca, the essential raw material required to produce the narcotic. The illegal groups responsible for producing cocaine in makeshift jungle laboratories not only place pressure on remote communities to grow coca but typically pay more for coca leaves than traditional legal crops. Until recently, one kilogram of coca leaf sold for $1.37, while coca paste, a crude, unrefined raw material used to produce cocaine, sold for $600 a kilogram. Those prices allow farmers to realize far greater profits than can be generated by legitimate crops with it speculated that they are making three or four times Colombia’s minimum salary of $330 per month. 

The considerable income coca cropping generates, combined with a weak state presence and illegal armed bands pressuring communities to grow the essential raw material for making cocaine, saw local economies become dominated by the activity.

According to the UNODC;

“Populated places near coca-growing areas offer greater supply and demand of services and goods, which is attractive to drug producers and coca farmers.”

That is invigorating the local economies of what are termed coca-growing hotspots located in the departments of Norte de Santander, Cauca Narino and Putumayo, which are now dependent on the illicit activity. All of those regions, with the exception of Cauca, are situated in oil rich parts of Colombia where there are significant petroleum industry operations.

The UNODC goes onto state:

“In coca hotspots, there is a greater flow of financial resources that stimulates trade and allows access to goods and services that would not have been available without the illegal activity.”

The recent coca price crash, which has seen the value of leaf and paste plunge by over 30% has seen a phenomenon typically associated with petrostates emerge in those regions, which is known as Dutch Disease. Essentially, this refers to the harmful consequences which emerge from a country experiencing a significant increase in income from a single resource or economic sector, which causes other industries to decline. A classic example of Dutch disease is the collapse of founding OPEC member Venezuela, which possesses the world’s largest oil reserves, estimated to be 303 billion barrels and was once a major petroleum exporter. 

Oil formed the backbone of Venezuela’s economy, with the country becoming even more dependent on petroleum extraction when Hugo Chavez took power in 1999. As production crashed because of weaker oil prices, endemic corruption, progressively stricter U.S. sanctions and a lack of vital maintenance, Venezuela experienced an economic crisis described as the worst to ever occur outside of war. The catastrophe that unfolded in Venezuela was compounded by the gutting of state institutions, corrosion of the rule of law and concentration of power in Chavez’s hands after he initiated his socialist Bolivarian revolution.

Parallels to those events playing out in Colombia’s rural regions that are dominated by coca cultivation, notably in the departments of Putumayo, Norte de Santander, Cauca and Narino since coca prices during the first half of 2020 collapsed. Various think tanks and government bodies estimate between 2021 and 2023 the price of coca leaf has fallen by at least 32%. Analysts believe the price of coca paste, a crude refined intermediary product that is a key step in extracting cocaine from coca leaves, has plummeted by at least 40%, with one kilogram in some areas selling for as little as a quarter of its value (Spanish) 2 years earlier. The coca price crash is being driven by a lack of buyers, which, coupled with increased cultivation, has left the illicit market oversupplied. 

While analysts are unsure as to why buyers have dried up there are a range of hypotheses being debated. One theory is the October 2021 arrest and then the May 2022 U.S. extradition of Dairo Antonio Usuga, alias Otoniel, leader of the Gaitanist Self-Defense Forces of Colombia (AGC – Spanish initials) caused demand for leaf and paste to plunge (Spanish). The AGC is Colombia’s largest illegal armed group and most powerful criminal organization dedicated to trafficking cocaine. This makes the band the largest consumer of coca leaf and paste in Colombia. Otoniel, after his arrest and extradition, is believed to be cooperating with U.S. authorities sparking considerable fear among the AGC’s leadership and associates. To minimize the risks posed by those events, the group has tamped down operations, causing the purchase of coca to plummet. Internal conflict and dissent with it rumored that the AGC is at risk of splintering are also weighing on coca consumption.

The National Liberation Army (ELN – Spanish initials), another major cocaine trafficker and buyer of coca paste, during December 2022 restarted peace negotiations with Leftist President Gustavo Petro. Both parties agreed to a six-month ceasefire starting August 3, 2023. For this reason, it is speculated that the last leftist guerillas have dialed down their cocaine trafficking activities. There is also a crackdown by Venezuelan authorities along the border with Colombia, which is impacting demand because the near-failed autocratic socialist state is an important transshipment point for cocaine cargoes. Falling U.S. cocaine consumption, in part due to the rising popularity of opioids, is another contributing factor, particularly with the country for decades being a key market for Colombia’s cocaine.

As coca-dependent regional economies crumble because of substantially weaker prices, rural communities are facing considerable hardship, including heightened food insecurity. The situation is so dire that scores of farmers are refusing to sell coca paste at such low prices, with some not selling for months, which is preventing them from paying workers and consuming local goods as well as services. Others are uprooting and replacing coca plants with opium poppy to take advantage of rising U.S. opioid consumption and declining Afghan poppy cultivation after the Taliban instituted a national drug ban. 

The hardship is reportedly so severe peasants are unable to afford basic necessities such as food and are fleeing coca-growing regions for displacement camps, towns and cities to find food as well as work. These events are creating a ready pool of combatants for recruitment by illegal armed groups which will only cause conflict to escalate. They are also responsible for a sharp increase in other illegal activities, including environmentally damaging artisanal gold mining, human trafficking and extortion. This is the fomenting conflict between illegal armed groups leading to heightened violence, causing the exodus of people from rural regions to grow while sharply impacting Colombia’s broader economy and crucial oil industry, which has significant upstream operations and pipelines in coca cropping hotspots.

By Matthew Smith for Oilprice.com

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