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Energy vs. Oil: Argentina’s Impossible Emergency

By | [email protected] | February 3, 2016 6:42pm


Argentina faces twin energy crises that literally and figuratively are screaming from the front of every newspaper in the country. The new government is ending electricity subsidies to consumers, which is resulting in 500 percent increases for families and consumers that meet fairly basic criteria. At the same time, world oil prices have dropped catastrophically over the past 18 months from close to US$100 per barrel all the way down to US$30. Yikes.

Requisite "plunging price" chart, courtesy of Nasdaq

Requisite “plunging price” chart, courtesy of Nasdaq

This leaves President Mauricio Macri’s government in an almost laughable conundrum. While he is bearing the political brunt for the removal of consumer energy subsidies, he is simultaneously under fire from oil and gas companies demanding — that’s right — energy subsidies for exported oil. In short, these energy companies wanted the Argentine government to pay them an extra US$23 per barrel exported to make up the difference between the world price and the fixed price of US$55 they used to receive within Argentina.

More simply, the oil and gas sector of Chubut Province wanted Macri’s government to fork over US$500 million to save 5,000 jobs in jeopardy due to low oil prices. That would have been US$100,000 per job saved, and completely ridiculous. Today the government agreed to pay a subsidy of US$10 per barrel exported, amounting to a total of US$125 million, or US$25,000 per job saved, to save 5,000 jobs for a period of only six months. If oil prices haven’t recovered in six months, we’ll be in the same situation except US$125 million poorer.

No Stranger To Oil Price Controls

Argentina has been meddling with oil prices to benefit domestic consumption since as early as 2002, when it imposed emergency export taxes on crude and refined petroleum. These export tax rates rose along with the world price of oil, and in 2008 when world prices reached US$120 per barrel, the price in Argentina was US$40, or one third. The same year the government threatened to ban all fuel exports unless domestic prices were lowered to those at the end of 2007.

Despite price controls and export bans, Argentina remained a net exporter of oil until 2011. The next year, Argentina now infamously nationalized now state-owned YPF from Spain’s Repsol. Repsol, like many companies operating in Argentina at the time, had stopped investing in exploration and development because at US$42 per barrel these activities were not profitable.

But now that the world price of oil has fallen well below the domestic prices fixed in Argentina, the situation has completely reversed. In the name of saving jobs, Argentina is now paying to extract oil for export, which amounts to basically shoving cash in the hands of foreign consumers.

So why doesn’t Argentina just use this extra oil at home in the country? We’re in an energy emergency, and will even begin importing gas from neighboring Chile shortly. Argentina imports crude oil from Bolivia. So why can’t this particular crude oil be subsidized then used in the country?

The Prize In Brief: Oil In Argentina

Crude oil is a term used to describe oil pumped from the ground, but in practice not all crude oil is created equal. Crude oil is classified as either “light” or “heavy” depending on its API gravity, or how heavy it is compared to water, viscosity and density. Light crude oil is low density, low viscosity and high API gravity, while heavy crude oil is the opposite. Crude oil is also classified as either “sweet” or “sour” based on sulfur content; sweet crude oil contains less than 0.5 percent sulfur, whereas sour crude oil contains greater than 0.5 percent sulfur. This translates into pricing, with light sweet oil commanding a higher price than heavy or sour oil.

Modern illustration of Argentina's oil reserves, Golfo San Jorge circled

Modern illustration of Argentina’s oil reserves, Golfo San Jorge circled

Why the quick chemistry lesson? Because besides impacting the price of crude oil, chemical properties also determine where this oil can be refined, or processed to create commercially applicable products. Oil refineries process crude petroleum into chemicals, gasoline for your car, kerosene, diesel, lubricants and finally tar and asphalt. Most importantly, oil refineries have to be built to process a specific type of crude oil defined by how sweet/sour or light/heavy it is.

This is relevant to what’s going on in Argentina’s energy politics. The protests that forced Macri’s government to fork over US$125 million to quell them were in Chubut Province, home to the Golfo San Jorge oil basin. The crude oil extracted from this basin is heavy crude called Escalante that is only worth US$23 today on world markets, a full US$10 dollars less than the average crude petroleum.

Why is the government subsidizing exported oil rather than using subsidies to make energy cheaper for consumers in Argentina? I’m glad my primer to the petroleum industry piqued your curiosity enough to ask. There are only three refineries in Argentina capable of processing Escalante crude, and between those three they can only process about half of the oil Chubut is going to pump this year. That leaves around 17 million barrels per year that are completely useless in Argentina’s domestic market where the price is fixed at US$55 per barrel, so they have to be exported.

So Argentina is in a situation where the government is using money from local taxpayers, who are literally undergoing an energy crisis from the removal of subsidies, to turn around and subsidize the extraction of crude oil to be consumed overseas.

Not Just Stupid, Unsustainable

Argentina’s government just poured US$125 million into the hands of foreign oil consumers to appease a serious labor issue in the short term. In six months, unless global oil prices have rebounded, the 5,000 oil workers in Chubut will be in exactly the same situation. President Macri’s predecessor Cristina Fernández de Kirchner was constantly in the crosshairs for implementing unsustainable, expensive populist policies that led to convoluted disasters difficult to unravel.

By shoveling cash to keep this problem from bubbling over, Macri’s government has failed to address a problem that the government actually is responsible for — access to employment.

The 5,000 workers facing unemployment are the government’s problem, the non-profitable oil companies should not be. The US$125 million would be put to better use providing a safety net, job training programs and building new infrastructure in the province to attract new industries not hogtied to the international price of oil. At the very least, it could be put towards building refineries or retrofitting existing refineries to be capable of processing Chubut’s crude.

Worse still, oil prices are forecast to stay below US$42 at least though 2017. I certainly hope Macri’s economic team has a strategy for rectifying price distortions that doesn’t consist of throwing US$250 million at the problem and into foreign consumers’ hands to mitigate unrest.