reflections

The Specter of Past Administrations Haunts Argentina's President

5 MINS READNov 15, 2016 | 01:21 GMT
The Specter of Past Administrations Haunts Argentina's President
(JUAN MABROMATA/AFP/Getty Images)
High oil prices could help the Argentine government in the short term as it tries to get the Vaca Muerta shale field off the ground. But if President Mauricio Macri can't get a handle on surging gasoline prices, he could pay a political price.
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

When global commodities prices began to decline, they took Argentina's economy with them, exacerbating the country's long-standing economic problems, such as high inflation, isolation from foreign capital markets and heavy government spending. Mauricio Macri won the presidency in November 2015 on a campaign to improve the country's economic straits, and his administration has made some progress in this endeavor over the past year. But at every turn, Macri has had to contend with the constraints he inherited from his predecessor, which have limited his success and may eventually spell his political defeat. Now, a bitter battle is looming over another relic of the past administration as Macri prepares to take on high gasoline prices — and the provinces they benefit.

Argentina has the highest oil prices in the world, as high as $63 per barrel on the domestic market. (Oil prices elsewhere are in the $40 range, where they have spent much of the year.) Argentina's exceptional oil prices are neither a recent development nor a surprising one. In late 2014, as oil markets around the world began to tumble, then-President Cristina Fernandez de Kirchner fixed the domestic price of crude oil at levels far above international prices to bolster Argentina's flagging oil and natural gas industries. Even before international oil prices began to tank, Argentina's energy sector was in the midst of a steady production decline. Without artificially high domestic prices, foreign firms would have pulled back their investment, further decreasing production and leaving the government to deal with lower revenue, higher unemployment and costly fuel imports. Fearing these outcomes and the toll they would have on her successor in the 2015 election, Fernandez took the most politically expedient path and raised oil prices to stabilize production.

In some ways, Fernandez's policy has paid off for Macri. Like the previous government, the Macri administration is focused on making Argentina's oil industry — and, in particular, the Vaca Muerta shale formation in Neuquen province — more attractive to foreign companies. Ramping up oil and gas production in the area would be an immediate boon for the country's economy and public finances while also reducing its dependence on imported oil in the long term. To that end, Macri's administration is negotiating with energy unions to implement labor regulations that are friendlier to private firms. For now, at least, high oil prices will be an advantage for the government, ensuring some level of investment in oil and gas production while Vaca Muerta gets off the ground.

But what works for companies and governments does not necessarily work for voters. Though they have stabilized production, high oil prices have also translated into high gasoline prices. Between October 2015 and October 2016, prices of the lowest octane gasoline rose by nearly 30 percent, thanks in part to state oil and gas company YPF, whose financial viability depends on high prices at the pump. This is bad news for Argentine consumers and, for that matter, their president. If the price of gasoline continues to creep up, domestic discontent will increase. Furthermore, rising gasoline prices could slow Argentina's economic recovery, especially since Brazil's economy, which accounts for nearly one-fifth of Argentine exports by value, will likely only emerge from recession in 2017 and grow slowly after that. A sluggish economy, coupled with stubbornly high inflation (partly spurred by high domestic crude oil prices), could cost Macri in the 2017 congressional elections and the next presidential vote in 2019, particularly as he attempts to implement stringent public spending cuts in the coming years. If Macri were to lose in 2019, a Peronist president would most likely succeed him, ushering in a new era of populist policy in Argentina, albeit probably more staid than during Fernandez's tenure. 

Hoping to avoid that outcome, Macri's administration intends to steadily reduce the price of oil — and with it, the price of gasoline — in a bid to stem inflation and spur economic activity until international oil prices normalize. But Neuquen, Chubut and Rio Negro, three provinces whose budgets depend on oil revenue, have made it clear that they will oppose these efforts, since artificially high prices benefit them. Though they have yet to announce how they plan to resist the president, Neuquen, at least, could use Macri's labor reforms as leverage to keep oil prices where it wants them. The regulations are currently still under negotiation with the Neuquen union, which has deep ties to the provincial government.

So how will the president proceed? It is unlikely that Macri will be able to unilaterally impose lower domestic prices on the provinces and companies that produce oil. Consequently, negotiation is the most likely option at Macri's disposal, though not a terribly promising one. Given that the oil market is expected to remain oversupplied, provincial governments, along with oil and gas companies, probably aim to enjoy artificially high prices for as long as they can. Although the unions and private companies could eventually concede to a deal with the government, it may not curb oil prices enough to benefit the Macri administration. Three years from now, Macri's measures will probably have made Argentina an easier place to do business, but the current administration can do only so much. In the meantime, the president will face an uphill battle in seeking re-election, largely because of his predecessor's legacy. 

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