Oil vs. Electricity: Argentina’s Impossible Emergency

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Twin energy crises at the worst possible time.

By Bianca Fernet, Argentina, The Bubble:

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 around US$30. Yikes.

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 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

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.

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 less than the benchmark grades WTI and Brent.

Why is the government subsidizing exported oil rather than using subsidies to make energy cheaper for consumers in Argentina? 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. By Bianca Fernet, The Bubble

Give it to us Straight, President Macri. Read…  Is Inflation Spiraling out of Control in Argentina, or is it just a ‘Sensation,’ as New President Claims?

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  15 comments for “Oil vs. Electricity: Argentina’s Impossible Emergency

  1. Vespa P200E
    February 4, 2016 at 3:34 pm

    To make matters worse they cannot borrow thanks to their disastrous defaults and cannot print more money since already facing high inflation (27% in 2015).

    And yeah socialist queen Cristina has been at helm from 2007 to 2015.

  2. TheDona
    February 4, 2016 at 4:26 pm

    Thanks Bianca! I learned a lot from this.
    My big question is; why is electricity so expensive?

  3. Paulo
    February 4, 2016 at 5:15 pm

    Instead of % increase in electricity billing, what is the actual charged price per KwH? Venezuala could raise it’s gas price by 1,000% and it would still be cheaper than what I just paid. Canada (my home) produces over 2X what is used domestically, so should we receive a subsidised rate? Of course not.

    Never mind, I just read the following account stating that the subsidies in Argentina were so large producers did not source out new supplies and customers found no reason to conserve their usage.

    The article, just written, goes on to state that the author’s last monthly bill was $20US.

    I understand people are angry about the change, but sooner or later unrealistic subsidies and Govt interference needs to come to an end in all markets. I suppose US bankers will be angry if they are not bailed out again. After all, were they not bailed out simply because of their influence on Govt? Same story, different chapter and different characters.


    • C.J.
      February 5, 2016 at 8:01 pm

      Paulo, good link there. BTW way back when, the editor of the Herald risked his life by publishing the names of the “desaparecidos”. Some brass. This column while written by a gubmint party think tank, not my cup of tea, makes some very good points. I haven’t visited BsAs in a long time but I gather that an A/C in every home on top of the big screen teevee and the pc has become the new energy hoag toy “must have” for the believers of the cargo cult of perpetual growth. That’s what new structural demand looks like, enticed by artificially low rates as effected by the last gubmint. That Vaca Muerta is the 2nd biggest shale oil deposit in the world it means jack sxxt. What counts is EROEI, net energy. Fracking has never been profitable, it’s only been a ponzi scheme of malinvestment made possible by 7 years of ZIRP. Not to mention the life killing nature of it. It will do diddly doot for Argentina. However the new boss is just like the old boss: wants to keep the Dead Cow alive for the enrichment of the few and political reasons.

  4. Chicken
    February 4, 2016 at 5:42 pm

    Soros had owned YPF stock this past summer, not sure if he still does or sold but perhaps shareholders have hired the Argentinian government?

    Looks like more proof and not very opaque at that, government no longer serves the public but instead, the public serves government and thus insider special interest groups.

  5. Jonathan
    February 5, 2016 at 3:11 am

    So many nations are finally cutting back on energy subsidies or getting rid of it altogether, and it couldn’t happen at a worse time for oil producers.

  6. prepalaw
    February 5, 2016 at 3:21 am

    Ok, why is the US subsidizing the solar industry – to enable Americans to purchase panels made in China?

    Let the solar stand on its own financial feet with government crutches.

    • Thpmas Malthus
      February 5, 2016 at 4:22 am

      Without subsidies the PV industry would not exist.

      I recently move to the sunniest part of New Zealand (to get as far away from the collapse that is coming as possible) and almost nobody has solar panels because they are far too expensive when your fellow taxpayers don’t subsidize your purchase.

      • Petunia
        February 5, 2016 at 10:45 am

        In Florida, there are many people with environmental concerns that want to go solar, don’t care about the cost, and can’t. Jeb practically outlawed solar when he was governor by allowing/encouraging communities to ban it for aesthetic reasons. It seems to be improving now, and it is not always about the cost, some people just want to get off the grid.

        After the last hurricane, I spent over a week without power. Even people who were not directly hit lost power.

      • RDE
        February 5, 2016 at 12:24 pm

        Without subsidies the coal, nuclear power and hydropower industries would not exist at all or at their current scale.

        Exactly how does your criticism make sense when applied to a new industry that competes directly against established energy sources that not only have huge previously subsidized costs incorporated into their infrastructure, but continue to benefit by passing on their environmental and health costs to the public at no expenset to themselves?

        • prepalaw
          February 5, 2016 at 1:11 pm

          Solar is mal-investment per se. The panels have to improve efficiency in converting solar energy by at least 50%. The last time I reviewed the subject, the best panels could only convert 20% of sun power to DC electricity. You really need about 30% before the investment makes economic sense.

          Additionally, when you convert DC electricity to AC, via an inverter, you lose between 15% and 20% of your energy via heat loss. And, you had better keep your panels free of dirt and grime and snow. Big lose of energy due to unclean panels. I don’t have a little man to go up on the roof and clean my panels.

          All in all, solar makes no sense now. I have the money to buy a large system 10 KW or more. And, NJ will subsidize the deal too for me. But, I will not do it. And, with the useful life of a panel about 25 years, who is going to remediate the spent panels when I go to sell my house. Unless technology has improved greatly (making solar panels more environmentally friendly), these thing contain heavy metals, like gallium arsenide.

          Are there any readers who have installed solar systems. I would greatly appreciate their input. I am looking for a bottom line Dollars and Cents analysis – total cash investment (without reduction for subsidies); and net return on investment, based on cash saved on electric bills and cash received from the power company.

    • TheDona
      February 5, 2016 at 2:10 pm

      Solar is in it’s infancy. There are some exciting breakthroughs using quantum dots…so we are talking below atomic level. The final result is it can be sprayed on. It is a long way off from being market ready but who knows, in 10 years it may be part of the roofing material itself.

      It is the whiz kids at the Universities working on this stuff.

    • william
      February 6, 2016 at 11:55 am

      In parts of Europe, governments are breaking promised to buy back extra energy produced by solar panels. Solar panel owners are not stuck with solar panels they overpaid for in hopes of getting 25 years of payments from their utility.

  7. February 7, 2016 at 8:54 am

    I know that the Argentinians have been paying peanuts for their electricity due to price subsidies. A 500% increase just brings them up to normal prices.

    The author isn’t against subsidies, which I thought was her point at first. The real answer is to get rid of ALL subsidies. Without doing so will always pervert the markets and the people always lose when that happens.

  8. Brian
    February 18, 2016 at 4:30 pm

    Argentina, what a huge accumulated problem caused by tsunamis of socialism. It will take great tough decisions to fix. I hope that they succeed. I hope the reachers will start by educating the future workers and leaders that it is a completely failed system.
    Now fotovoltaic energy. The myth is that it is a reliable and dependable alternative. This is because it requires other energy investments to take over when the sun can’t get through or it is night. There is no penalty for non- production but the other 24/7 power providers don’t get compensated when they have to “save the day”. It is really only suitable for those who can afford huge investments in battery storage with all those associated problems.

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