Subsidies and price controls may soon be a thing of the past.
By Allison Fedirka Oct. 2, 2017
Argentina has passed a milestone in its efforts to open its economy and reduce government interference in the energy sector. For years, domestic fuel prices had been set by the state and energy companies, but starting Oct. 1, they will instead be tied to global oil prices, and companies will be able to adjust them accordingly.
This is one part of the government’s broader efforts to reduce subsidies and state controls over the economy in order to move the country toward a more market-friendly environment.
Controlling the Market
Fuel prices in Argentina haven’t been harmonized with international fuel prices for over 16 years.
The government controlled the market – restricting domestic prices and exports when prices were high globally and propping up domestic prices when they were low – while also keeping energy costs low for consumers.
This was part of the populist policies supported by the administrations of former Presidents Nestor Kirchner and Cristina Fernandez.
They prioritized consumers’ access to cheap fuel and domestic energy production to maintain high employment rates and ensure that provinces would continue to receive royalty payments from producers. This is one of the major reasons subsidies and state intervention persisted regardless of whether oil prices were high or low.............
When President Mauricio Macri took office in 2015, he inherited an extremely distorted energy sector that relied heavily on subsidies and was not well integrated with the international market. The amount of money the government was spending to prop up the industry was unsustainable; substantial reform was inevitable. The government, for example, stopped subsidizing oil exports from Argentine producers. But the changes needed to be implemented gradually so as not to destabilize the sector or cause a spike in inflation. As a result, the government held off on completely eliminating its oil production subsidies..........To Read More....