The New York Times has an article today entitled, “Neighbors Challenge Energy Aims in Bolivia.” It is quite informative. But it gives the wrong impression about the effects of Bolivia’s energy policy under Evo Morales. The article makes it seem as though Bolivia shot itself in the foot by nationalizing the gas. That is probably not true. Rather, Bolivia has shot itself in the foot by refusing to build a pipeline to Chile.
Argentina’s energy policy has nothing to do with Evo. In fact, inasmuch as Argentina has a coherent energy policy, it currently revolves around importing more Bolivian natural gas. Its roots lie in the peso devaluation of January 2002. The government froze the peso-price of natural gas, in order to protect Argentine consumers who were already suffering an economic downturn considerably worse than the Great Depression. The effect was to knock down the residential gas price from $1.88 to 66¢ per MMBTU.
That wasn’t a problem until the southern hemisphere winter of 2004, when gas companies cut supplies to large industrial customers. After all, they could get much higher prices from exporting the gas to Chile. Well, the Kirchner administration reacted much as you’d expect: they banned gas exports. The Interior Minister of Argentina apologized to the Chilean government for the interruptions — but in May 2005 the Argentines once again slashed exports to Chile. The story repeated itself in 2006, when Argentina cut exports altogether for two weeks. In fact, Buenos Aires added insult to injury when the government raised export taxes from 20% to 45%.
Eventually, however, as the economy recovered, Argentina stopped being an exporter. So the Fernández administration began to walk back the policy. First, she allowed prices to rise to around $2.50 per MMBTU. Second, she created incentives to increase the domestic supply. Finally, she moved to try to lock-in relatively low gas prices from Bolivia. Argentina imports LNG, but it costs twice as much as Bolivian gas. The country’s LNG terminal offers a useful hedge against any Bolivian attempts to renegotiate the contract, but both parties would prefer to buy Bolivian gas for $5 instead of Trinidadian gas at $10. (In fact, the terminal goes unused for long periods.)
What about Brazil? Well, what about Brazil? It is true that the nationalization provided some impetus for the country to become self-sufficient, but less than you might think. First, the Brazilians pushed back hard, even threatening to dismember Bolivia if it messed with the price or volume terms of the contract. And Brazil won. So while Petrobras may have been disillusioned, the situation worked out well from Brazil’s point of view.
In fact, Brasilia had a good reason to want to allow Bolivia to retain more of the rents from resources, as long as Brazilian consumers weren’t affected. Simply put, the bet was that a wealthier Bolivian government would result in a more stable Bolivia, and it’s politically easier for Brasilia to aid La Paz by resisting pressure to defend Petrobras profits than it would be to write checks. The logic is identical to that behind the 2009 renegotiation of the Paraguayan hydropower contract — the primary difference being that since Brazil initiated the hydropower deal, it has been able to extract more political benefits from Asunción than it has been able to receive from La Paz.
Now, many people in Brazil say that Petrobras is upping domestic production in response to Bolivia’s tax hike. It may even be true. But we don’t know! Domestic exploration was good business with or without Evo Morales. The increase in Bolivia’s government take made it more so, but we don’t have the numbers to say that domestic supply would not have increased regardless. I’m not faulting the article; it’s a subtle point. I am faulting them for getting Argentina backwards ... but with Brazil, we just don’t know if Evo really mattered.
Chile is where the article is spot on. After Argentina cut the taps, the Chilean government attempted to strike an agreement to build a pipeline from Bolivia, but the negotiations ignited a firestorm in Bolivia. The anger surged over the fact that the pipeline would pass through territory that Chile had seized from Bolivia in 1878. Horrors! The Chilean government periodically floated a trial balloon of transferring a strip of land along the Peruvian border to Bolivia, but Lima protested, since Chile’s far far north had been originally seized from Peru.
Nobody in Peru seriously contested the border ... but accepting a century-old annexation and allowing the annexed land to be transferred to a third country were very different things. After a brief and goofy Bolivian flirtation with the idea of building an underground pipeline that would surface far out to sea, the idea died. And thus Bolivia lost a natural market, and whatever possibility it had of producing LNG.
The article makes no effort — not that it should! — to produce a cost-benefit analysis of Bolivan policy for Bolivia. The country lost opportunities in Chile and it may have lost opportunities in Brazil ... but it got a lot more revenue at a politically-dicey time. That, I have to say, is not nothing.
What should Evo do now?
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