June 2018 – @alvaroriosroca – Now that oil price is around US$70/barrel and in a speculation market, where many people argue it may push it up to US$100/barrel or more, energy subsidies phantom is back, impacting several countries of the region.
Long term subsidies are extremely perverse for countries economy and also for the people. All over time, different governments of the region, mostly populist, have established / maintained subsidies for oil prices, sometimes with very sensitive and commendable proposes, but more often with the eagerness to get votes and maintain themselves in power.
However, subsidies bill has to be paid sooner or later and these do so when oil price and energy together are high as today. Economies of the countries suffer looking how their payment commitments goes up, public companies collapse and the fiscal deficit rises like foam. When adjustments and cut subsidies are required, citizens and companies are not prepared to manage them and there are very strong social, political and institutional crises as the ones we live today.
Energy subsidies also boost inefficiency and loss of competitiveness in the long term. Whenever prices are low, no one take care on money spent, or in saving energy and consumption is uncontrolled. There are no signs to take energy efficiency seriously and waste energy is the practice.
The most benefited with subsidies, are rich people. Families with two or three vehicles, those who currently travel and have heated swimming pools and many other high-energy pleasures. Therefore, most of population who has no much money, the one who walks, who moves by bus, by subway, who lives in a humble room, ends up subsidizing the one with a better economic position.
Long term and strong energy subsidies also lead to shortages such as Venezuela and Argentina. Investments in power generation and hydrocarbon exploration are ward off and importation is needed. Public transportation and distribution services are not well maintenance and cannot expand, damaging to all their citizens. Neither does it allows the entry of new and efficient technologies such as solar or wind energy to compete.
Some economists argue that sustaining subsidized energy prices are incentives for development and economic growth. That’s not true. For example, countries such as Chile, Peru, Paraguay, Uruguay, Costa Rica and others that have not practiced subsidies have led economic growth and greater social stability in the region. Its citizens and businessmen have get used and adapted to these fluctuations.
In future, if Venezuela wants to get out of the deep crisis, it will have, with any doubt, lift the absurd energy subsidies. Unfortunately, they will have to do it when their oil production is droping dramatically. If Argentina does not settle the energy subsidies issue, the fiscal deficit will become even more unsustainable and the situation will continue hanging over as Damocles’ sword over its society. In Brazil, because they had used to law energy subsidies and prices, transporters have paralyzed and claim for subsidies again. Petrobras stocks have been affected; its investors are in alert. If Brazilian Government doesn’t want to impact the companies and investments, it will have to assume the subsidies, in a moment where Brazil has no much space for maneuver.
In Bolivia, the government has recently raised power prices twice as well as the gas price for the industrial sector; we consider that it will continue to do so since it understands that the fiscal deficit cannot continue and increase jeopardizing the economic stability.
We reiterate, countries such as Chile, Peru, Paraguay, Uruguay, Costa Rica and others that have not experienced subsidies have get used to these ups and downs in energy prices and have become competitive, have diversified their economies and have less social and fiscal deficits issues. Experience and pragmatism must prevail over populism.
* Current Managing Partner of Gas Energy Latin America.