Photo via wintershall.

For the first time in 16 years, the Argentine government will take a step back and release crude oil prices. This means that instead of controlling what suppliers can charge for their oil, the government will let prices be determined freely by the market and by the oil companies themselves.

This past January, the “Agreement for the Transition to International Prices of the Argentine Hydrocarbons Industry” (it’s a mouthful, I know) provided that the government would conduct quarterly price revisions on oil that would take into account the recent oil and biofuel prices, and well as the dollar/peso exchange rate. The agreement also mandated that if the international price of crude oil remained higher than the domestic price for ten consecutive days, then the government would release the price of oil.

According to La Nacion, that is exactly what happened as of September 13, the tenth consecutive day that international prices exceeded domestic prices.

So for the first time in 16 years, the government has released control of gas prices. What does this mean in terms of price level?

If you ask Raúl Castellanos, the Secretary of the Chamber of Fuel Entrepreneurs, he will say that it does not mean very much. He thinks that “we should not expect large variations in sale prices.”

“The mechanisms of revision will be the same, but [they] will be done in real time…Segmented over long periods of time, surely the prices will stay on a similar course to their current one…Prices in October will increase 6 percent.”

In slightly simpler language, Castellanos believes that even though individual companies will decide their own gas prices, they will choose their prices using similar methods that the government was previously using for its quarterly revisions. Consequently, the 6% increase in prices that Castellanos predicts for October is not that different than what he anticipates the price hike would be were it still up to the government.

Photo via ALABC.
Photo via ALABC.

He goes on to point out that while any decreases in international oil prices could result in lower domestic prices, it is difficult to realistically foresee cheaper gas prices in the near future of a country with inflation as high as Argentina’s.

If the dollar/peso exchange were to drop, however, a price decrease could become possible.

Juan José Aranguren, Argentina’s Minister of Energy, agrees with Castellanos that these actions will have “very little” effect on gas prices.

He affirms that “companies, especially at this stage in the [midterm] elections, are not going to make a decision” that would have drastic market effects. The price release is not permanent; if international prices are no longer greater than domestic prices, then starting November 1st, the agreement (the aforementioned agree with the really long name) would go back into effect, and the government would again conduct periodic price revisions that controlled market oil prices.