It’s hard to think of a better way to discourage production, or investment in production.
I wrote the other day about the introduction by the Argentine government of a “price agreement” with supermarkets to limit monthly price increases to a maximum of 5 percent for 90 days. The move, explained the economy minister, Sergio Massa, was designed “to stabilize prices” until the election. By a strange coincidence, Massa, a Peronist, is running for the presidency.
I missed the fact that the government has also put in place similar measures with regard to fuel prices.
Argentina’s economy ministry . . . will freeze fuel prices until October 31 after an agreement with the industry as a measure to help tamp down triple-digit inflation.
In a statement, the ministry said the government will cut taxes in exchange for the price freezes, but added that the tax benefits can be “taken away” if companies violate the agreement.
The Buenos Aires Times (August 18):
Argentina has fixed the price of oil received by drillers at US$56, far below international levels. . . . Crude drillers in burgeoning shale patch Vaca Muerta will get US$56 a barrel until October 31. Argentine oil prices were already decoupled from global markets, but Thursday night’s decision means shale companies will receive 11 percent less than the US$63 at which local light crude was trading in the second quarter. The new price is also a big deviation from Brent, which is hovering at US$84.
Producers of heavier Escalante crude from other regions will get a US$5 discount on current prices, according to one of the people.
A spokesman for Economy Minister Sergio Massa declined to comment on the new barrel price, pointing only to the minister’s public remarks on Thursday freezing gasoline and diesel prices through October.
Argentina has frozen fuel prices at the pump after refiners, including market leader YPF, hiked by 12.5 percent this week in the wake of a slump in the peso.
Massa, the ruling party’s candidate in October’s presidential election, is trying to stop the full weight of the devaluation from immediately passing through to consumer prices across the board. Inflation in July was already running at 113 percent.
Oil producers are being made, in part, to bear the cost of capping fuel prices. That could be bad news for activity in Vaca Muerta, which Argentina wants to develop as quickly as possible to spur exports and bring in much-needed export dollars.
But interventions like this one have held back the region, whose crude production of roughly 300,000 barrels a day pales in comparison to rival shale formations in the US.
Massa promised drillers some benefits in return — the deferral of export taxes, quicker access to hard currency and, potentially, relief from some import taxes, one person said.
The decision recalls a controversial policy during the last presidential campaign in 2019, when the peso weakened and [then center-right president] Mauricio Macri moved to control fuel prices.
It’s hard to think of a better way to discourage production, or investment in production.
On the other hand:
Javier Milei, the libertarian front-runner in this election race, promises to free up Argentine oil markets completely.
Marcos Falcone, writing for Capital Matters in April:
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.
As Falcone explains, increased production from Vaca Muerta will not, by itself, be enough to solve the problems caused by the Argentine government’s chronic overspending. But it would come in handy, if politics and the consequences of the economic chaos engulfing the country don’t get in the way.
The perilous state of Argentina’s foreign-currency reserves has meant that drillers have struggled to get hold of the equipment they need. According to a report from early August, customs have recently approved the import of 7 percent of what was required. Such restrictions not only risk the build-out of the field, but threaten existing production, the last thing the country needs.
[This] is Argentina, the heartland of political volatility and economic mismanagement, where a lot of things can go horribly wrong. In fact, the industry has been operating under difficult regulatory and economic conditions for the past two decades; the Vaca Muerta boom should have happened much sooner.
Capital controls and multiple exchange rates complicate the development of a solid supply chain and oil services network. High financing costs or lack of access to international markets altogether diminish private investment opportunities. The government has tended to cap crude exports and domestic gasoline prices to privilege the local market, shielding consumers from higher international prices at the cost of limiting shipments and discouraging new investments. . . .
Argentina has a long history with oil and gas exploration, first finding crude in the country’s south more than a century ago. It once produced more oil than Brazil (today, Brazil produces about five times more than its southern neighbor). But macroeconomic instability, energy nationalism and policy zigzags — privatizing YPF, only to then nationalize it again 13 years later — greatly curtailed the industry’s potential.
Now geology, technology and even geopolitics are opening a new opportunity for Argentina before hydrocarbon demand peaks. Let’s hope the country’s politicians don’t blow it.
The precedents are not encouraging.