Argentinian politicians look to the Vaca Muerta shale deposit to rescue them from irresponsible spending. It won’t work.
Argentinian politicians look to the Vaca Muerta shale deposit to rescue them from irresponsible spending. It won't work.
A s has become customary, Argentina is in economic trouble. One of the aspects of this latest crisis is (again not for the first time) that the country “lacks” dollars. Net central-bank reserves, currently about $1.4 billion according to private estimates, are meager. Both the current government and the opposition, which is poised to win the presidential election later this year, are looking towards one potential savior: a vast oil-and-gas deposit called Vaca Muerta (“dead cow” in Spanish).
Discovered in 2010 by the state-owned YPF, Vaca Muerta is the largest shale deposit ever found in Argentina. In an increasingly polarized country, Vaca Muerta has become a symbol of cross-party collaboration. During the center-right Macri administration, production increased by a factor of five. Now, the Peronist Fernández administration is rushing to finish a pipeline that will ease transportation of gas to the Buenos Aires metropolitan area and the rest of the country. This means Argentina would save about $2 billion currently spent on gas imports, according to government figures.
Vaca Muerta, in short, is poised to become a success for Argentina. But who would benefit from this? There is speculation that the current administration, led by Alberto Fernández, is seeking to increase the pace of the project so that there can be savings this winter (June to September). Timing is crucial: The primary presidential election, in which voting is mandatory and thus signals who the winner of the first ballot will be, is taking place in August, and the general election is taking place in October. Peronists are not doing well in the polls, and, if nothing changes, the opposition could win.
But there is another event about which politicians and economists are becoming increasingly worried: a drought. Not enough rain has fallen in most of rural Argentina during the past few months, and harvest time is approaching. If nothing changes, exports could fall by $20 billion this year. In 2022, Argentina’s exports were worth a little more than $88 billion, so this would be a dramatic fall, not helpful at a time when the country needs every dollar.
Under these circumstances, Vaca Muerta will not be enough to save the day this year. But if we take a step back, where does the original problem come from? What exactly does it mean that Argentina “lacks” dollars? To answer this question, it’s essential to understand the nature of the current economic crisis.
To oversimplify, the starting point for the “dollar problem” in Argentina is that the government has been spending more than it has been taking in since 2009, when Cristina Fernández de Kirchner, the current vice president, was president. Because of the investors’ unwillingness to buy Argentinian government bonds, simply printing money has become the easiest solution to the deficit, but “solving” that problem has created another: Inflation is now running at over 100 percent. Consequently, people rush to swap their pesos into dollars whenever they can. This pushes the exchange rate of the peso down even further. But the government correctly believes that the depreciating peso adds to inflationary pressures, and so it regulates the local currency market in ways designed to prop the peso up.
The result of this is that there are multiple exchange rates in Argentina now, which range from the (unofficial) dólar blue (essentially the street price) to dólar Qatar (a rate for credit card transactions in Qatar during soccer’s world cup). The price of the dólar blue (roughly 390 pesos to the U.S. dollar) is closest to a free-market value on the peso, although that exchange rate builds in a premium to reflect that in most cases Argentinians can only buy dollars in limited quantities (at an official rate of 210 to the dollar). But as the existence of the dólar Qatar would suggest, the government’s intervention in the currency markets is not confined to setting an official rate.
For example, to incentivize oil-and-gas production, there is now even a Vaca Muerta dollar. In this case as well as in others, the government subsidizes importers through the official exchange rate. On the exporters’ side, the government either allows local companies to convert a certain percentage of the dollars they receive into pesos at a rate better than the official (though not the free-market one), or, as in the case of Vaca Muerta, it makes exceptions for foreign companies so they can elude capital controls and take part of their income back to their countries at the official exchange rate.
But helping out Vaca Muerta and other producers through various artificial exchange rates is causing the central bank to lose net reserves, in a vicious circle that cannot last. The government is hoping that a Vaca Muerta miracle will keep the system afloat, but its very nature (as well as exogenous shocks such as the drought) threaten to sink the whole effort.
The “lack of dollars” in Argentina that Vaca Muerta is supposed to solve, in the end, is related to the deficit, and it always has been. For decades now, and with only short-term interruptions such as in the ’00s, the country has spent more money than it can collect through taxes. Vaca Muerta can be helpful in boosting Argentina’s exports or reducing its dependence on foreign oil and gas, but it will be a drop in the ocean as long as the deficit persists.