Political Risk Latin America Blog @PolRiskLatam

Confronted with Surging Demand and Stagnant Production, Argentina set to Raise Energy Prices

Posted in News and Articles, Political Risk by politicalrisklatam on October 8, 2010

Michael Graybeal for Center for Strategic & International Studies, October 8th, 2010.

A recent article by Jude Webber in the Financial Times’ beyondbrics blog highlighted the Argentine government’s intent to decrease some energy subsidies as the end of winter approaches.  While the news has largely flown under the radar in the Western Hemisphere, this development represents a noteworthy change in Argentine energy policy – if with the follow through takes place.  Largely seen as an example of how not to manage energy prices, Argentina’s energy policy since its economic crash in the early 2000s has hindered a country that appeared to be on the verge of becoming a major exporter of natural gas.  Instead, the opposite has happened, and the last decade has seen a boom in natural gas imports to meet domestic electricity demand.  To understand where Argentina went wrong, it helps to examine how the country’s economic crash in 2001-2002 rippled through the energy sector.

Following the collapse of the currency board and the devaluation of the peso, end user prices for most consumers were frozen.  This contributed to a surge in consumption as the Argentine economy, with the newly devalued peso, quickly recovered.  By the mid-2000s, Argentina was faced with chronic energy shortages, leading to occasional blackouts in Buenos Aires and political embarrassment for then-president Néstor Kirchner.  While the federal government allowed a partial increase in prices for larger industrial and commercial users in 2004, most other users have seen little, if any, price increases since 2003.  As a result, Argentines pay far less for energy than residents of neighboring countries.  Webber states that residents in Argentina pay 0.29 pesos per cubic meter, far less than residents in Chile (4.6 pesos) or Brazil (8 pesos.)  With this price applied evenly across the population regardless of income, calls for price hikes have met strong resistance from the middle class – which has seen its purchasing power eroded by Argentina’s inflation rate of 20 to 25 percent over much of the last decade. (continue reading… )

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