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GHEI: Argentina’s theft
Nationalizing the oil industry won’t be as fun as expected
Question of the Day
Leftists love to hate Big Oil. Extracting crude and refining it into a usable energy source is necessarily a massive operation involving great risk, expense and profit. That makes the industry a natural target for demagogues. Argentina is taking the politics of envy to the extreme. On Thursday, the Argentine Senate voted to approve President Cristina Fernandez de Kirchner’s decision to nationalize the country’s leading oil company, Yaciminetos Petroferos Fiscales (YPF). The rash move is only going to make the fiscal situtation worse.
Standard and Poor’s thumped the country this week with a negative rating, saying the expropriation would “exacerbate the existing weaknesses in Argentina’s economy.” In nationalizing YPF, Mrs. Kirchner has set her nation on a backward path toward instability and inflation.
At the turn of the 20th century, Argentina knew better as one of the world’s richest countries. Today it is a member of the elite Group of 20 because of the past, not because of its current performance. Argentina’s economy has been overtaken by many non-G-20 countries, including Spain, the home country of the investors whose $10.5 billion in property Mrs. Kirchner’s government has expropriated. Spain is threatening retribution, ranging from seeking international arbitration to sanctions on Argentine exports from the World Trade Organization. The European Union, of which Spain is a member, is backing the demand for compensation.
Madrid is coming to the defense of Repsol, which previously held the majority stake in YPF. With nationalization, the Argentine government controls 51 percent of YPF’s shares, leaving Repsol with 6 percent. This expropriation was justified on the grounds that Repsol failed to adequately exploit Argentina’s oil and gas reserves, yet Buenos Aires is largely to blame for discouraging development.
Like its neighbors in Brazil, Bolivia and Venezuela, Argentina has been retreating from the free market in favor of export tariffs and other trade restrictions. The state imposed a complex mix of subsidies, export taxes and price caps on energy that, not surprisingly, depress not just production in the short term but also investment in the future. The price cap meant that domestic prices in Argentina remain well below those in Brazil and Uruguay, leaving little incentive for Repsol to risk its capital in Argentina. Nationalization will not change the hard math: YPF cannot continue to sell below cost forever, nor can the Argentine government afford to fund the difference.
That’s because Argentina’s cost of borrowing has soared, with S&P giving a lousy B rating on its sovereign debt. Inflation is rising, and capital is going to flee the country as other companies understandably pack their bags and get out before they become the next victims.
These disastrous policies were tried in the 1960s, and they failed. Argentina is a poster child for the ease with which bad policies can destroy a resource-rich nation. The few countries that have respected property rights and the rule of law are the ones that have prospered. Argentina isn’t the only country that needs to learn this lesson.
Nita Ghei is a contributing Opinion writer for The Washington Times.
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