Confident Before Midterms, Macri Liberalizes Oil Market

Subsidies and price-setting have long been controversial economic and political themes in Argentina. For years, the government’s fixed price for domestic oil production – and by extension the fuel market – far exceeded international prices. The policy was politically driven, intended to support domestic drilling and employment. Given low global oil prices and Argentina’s lackluster economy, the system was particularly important for provinces heavily reliant upon hydrocarbon revenues.

However, Energy Minister Juan Jose Aranguren announced last week that international oil prices had risen sufficiently to end the price-setting system. Accordingly, on 1 October, Argentina’s oil and fuel prices returned to the hands of the free market. The decision formally ends the country’s long-awaited transition to international oil price parity. It also terminates the agreement that had been agreed upon by the industry and key stakeholders in January, which entailed a mechanism for quarterly public reporting on fuel prices.

Interestingly, the announcement aimed at the fuels sector came soon after news circulated that the government is far behind on a similar subsidy to natural gas producers. According to media reports, the government owes at least $700mn to a host of natural gas producers, including state energy firm YPF.

Aranguren doubted that there would be an immediate price hike for consumers in the wake of liberalization. However, according to the previous price-setting agreement, the latest quarterly review was slated to boost fuel prices by an estimated 6%. Meanwhile, news has emerged in the first days of the liberalized market that some vendors, such as Shell and Puma, will increase prices by 10% for their wholesale customers. Prices at the pump have thus far remained unchanged, however.

In order for the liberalization to truly boost efficiency and competition, consumer prices must reflect market rates. We therefore expect slight price increases, albeit without causing disruptive consumer protests, at least prior to the midterms on 22 October that have captured the nation’s attention. In our view, developments in the fuel market in November and the months afterwards will be more accurate indications of Argentina’s pace in returning to international price parity.

The removal of fixed prices will likely increase competition along the entire energy value chain, particularly affecting firms that have stakes in both the upstream and downstream segments. Meanwhile, oil-producing provinces that benefitted from years of fixed prices may henceforth receive more volatile energy revenues and royalties. Additionally, any pressure exerted by governments and firms on oil unions to reduce costs (in line with the more competitive market) bear close monitoring.

The government has yet to publish estimates of how much it may save by abandoning the price controls. Nevertheless, removing price-setting mechanisms and distortive policies has been at the center of the Macri administration’s agenda to boost the economy. News of the government’s considerable debts to natural gas producers and corresponding budgetary strain underscores this point. Reducing fiscal drains on the economy is critical, particularly as inflation remains high and the government must borrow heavily to cover a budget deficit that exceeds 6% of the nation’s GDP. (However, Aranguren did note that the government could resume price-setting in the event of another substantial global oil price downturn.)

The midterms are widely seen as an unofficial referendum on Macri’s policy prescriptions, and he is riding high at the moment. Recently released figures on economic growth were the highest since the government took over, and political fragmentation continues in the opposition. That the price liberalization of the country’s fuels market goes into effect just three weeks before voters head to the ballot box underscores the Macri administration’s confidence.