The first round of the Argentine presidential election threw up a surprise: the center-right mayor of Buenos Aires, Mauricio Macri, came within a hairs-breadth of Daniel Scioli, the candidate of the leftist ruling coalition. The result forced the election into an unexpected run-off between the two leading candidates. Macri is now believed to have a very good chance of winning the run-off tomorrow. Macri and Scioli are far apart on many issues. The markets, certainly, think that the election matters: Argentina dollar-denominated bonds due in 2017 jumped 10% on the first-round election results. The Merval stock market index rose almost 5%. Analysts have predicted an additional rally of as much as 30% if Macri pulls out a victory.
In other words, this election matters. And one of the ways it matters is in energy policy. But the way it matters is a little odd. Actually, a lot odd.
Short version: if you like big oil companies, then you should love Peronism! The Kirchners are the best thing for Big Oil since, I don’t know, the Iranian Revolution?
Longer version: The Kirchner administration (2003-07) and the first half of the following Fernández administration (2007-date) did everything they could to make life difficult for the upstream sector, culminating the nationalization of Repsol YPF in 2012. Since then, though, the Argentine government has been running hard in the other direction, handing out windfall past subsidy to the upstream sector. (The government resolved the Repsol expropriation in a way that satisfied the oil companies.) In petroleum, those windfalls run pretty far downstream.
A bit more detail:
- Argentina controls the oil trade. Exports are allowed only when the international price is below $77; imports are banned. When world prices were high, Argentine producers hated this. But now that world prices are low they love it: Argentine crude oil producers currently sell domestic crude similar to WTI for $85 per barrel at a time when their American counterparts are lucky to receive $42. As an added sweetener, whenever prices are below $81 ($66 for some fields) the government will hand them a $3 per barrel direct subsidy.
- Argentina controls retail gasoline prices. In October 2015, Argentine gasoline prices averaged $4.96 per gallon. The pre-tax price averaged $3.00. (Calculated from data on page 79.) Argentine refineries paid an average of $77 per barrel. Well, the last time that crude cost $77 in the United States was November 2014, at which point American gasoline prices averaged … wait for it … $3.00 per gallon. In other words, the petroleum industry ain’t hurting.
- Natural gas producers now get $7.50 per MMBTU for production from new sources. This at a time when the landed price of liquefied natural gas in Argentina is $6.77! Not too shabby. While we’re at it, Scioli, the left-winger in the race, has promised to raise the domestic price for new natural gas production to $12.50.
In short, the left-wingers in the Casa Rosada are in the midst of engineering a massive wealth transfer from Argentine consumers to hydrocarbon producers. ¡Viva Kirchnerismo!
So where is the populism in modern-day energy Peronismo? Electricity. Electricity prices have been controlled since the 2002 crisis. The government authorized a 72% rise in 2013, but that still left average retail prices around 1¢ (U.S.) per kilowatt-hour. At those prices, the only way to keep the lights on has been to pump public money into electricity generators and distributors. (See below; the 2015 figures are my estimates from Argentine nominal GDP data provided by a private consultancy combined with data on electricity subsidies for the first six months of the year.) They have been more successful than Venezuela’s monumental incompetents, but there have been growing brownouts and the utilities are facing bankruptcy despite the subsidies.
There are subsidies and they are not unaffordable … but like most electricity subsidy schemes, they benefit the middle class and the rich rather more than the poor.
Scioli would keep the hydrocarbon subsidy schemes in place. That would be awesome for oil companies. He would also likely keep the electricity subsidies in place for as long as the country can afford it. Which could be a long time, if he gets public spending in order elsewhere. It isn’t how I would spend the national fisc — and it begs the question of how you limit consumption in the absence of price signals — but it won’t arrive at Bolivarian levels of crazy for a few years yet.
Macri would scrap the upstream subsidies. His chief energy adviser is Juan José Aranguren, the head of Shell Argentina, and Macri has said that he intends to appoint Aranguren to a cabinet-level post if he is elected. Aranguren is long-standing critic of the Fernández administration’s energy policies. I’ve met the man — he has a refreshingly German level of bluntness about him — and I have little doubt that he will unwind the web of controls and subsidies.
Argentina being Argentina, this is one of the few cases around the world where an openly right-wing policy immediately redistribute billions of dollars downward. ¡Viva Aranguren!
Electricity policy under Macri is less clear. His political party, the Republican Proposal, has an in-house think tank called Fundación Pensar, and Fundación Pensar’s energy policy head, Sebastián Scheimberg, has publicly stated that electricity subsidies need to be removed. But that would hurt a lot of people very quickly, including a lot of poorer people. (Saying that the subsidies benefit the middle class and rich more is far from saying that they don’t also help the poor. They do. A lot.) And Macri got burned from a price hike during his time as mayor of Buenos Aires. Since punting and waiting for another opportunity to score is an option, then I think that is exactly what he will do. He might surprise with a social tariff, but I do not think it will be a priority.
Happy election watching tomorrow!