June 2020 – @alvaroriosroca – In our May issue we explained why prolonged subsidies to energy and hydrocarbons in particular end up being perverse to economies and societies as a whole.
Throughout time, successive governments of the planet and the region, mostly of a populist nature, have established and/or conserved subsidies, sometimes with very sensitive and noble intentions, but most of the time in a mere desire to vote and try to stay in power https://www.gasenergyla.com/es/perversos-subsidios-politicos-estadistas-vs-populistas_por_alvaro_rios_roca/
We said that subsidies make countries’ economies suffer because they see their coffers bleed, state enterprises collapse and the fiscal deficit rises like foam. Subsidies encourage inefficiency, loss of competitiveness, waste in the long run (gasoline in Venezuela) and that it is the rich and wealthy who are most favored.
Prolonged subsidies also lead to shortages, as is the case in Venezuela and Argentina, for example, because investments are driven away and new and efficient technologies such as solar or wind energy are not allowed to compete.
We sincerely believe, and we have stated so, that now is the right time for several countries in the region to raise subsidies by taking advantage of the low international prices of oil, natural gas and their derivatives. As we said, a state government (and not populists) would do it without a second thought. And that is what President Lenin Moreno has done, hand in hand with his Minister of the branch, Rene Ortiz.
President Lenin Moreno understands very clearly that the subsidies that were given to various oil products are perverse to his country’s economy. In October 2019 he already had violent protests for trying to raise them abruptly and he had no choice but to back down because the social citizen protests (which are justified) were joined as always by political factors of the previous government.
However, intelligently and very well advised, he has modified the Price Setting Regulations (No. 1054) to allow for the reform of fuel prices, allowing private companies to import fuels at international prices as well. This means that Petroecuador (his state-owned downstream company) no longer sets prices at the discretion of Carandolet in response to social or business pressures.
Now that the prices of the different gasolines (Super, Ecopais, Extra) and diesel are low in the international market, Ecuadorians do not feel the measure at once and have rather begun to receive the benefits of lower prices. What is more important is that they are getting used to prices fluctuating with the market (as is the case in Peru, Brazil, Chile and other countries). When the prices of oil and its derivatives rise, Ecuadorians will no longer have to suffer the so-called gasoline, gasoline or diesel fuel shocks that have led several presidents in the region to lose popularity and even the presidential chair.
The Petroecuador company will now be able to acquire at market price oil produced internally or finally import it to process it in one of its three refineries that it has and will have to compete with imported products. Petroecuador will be able to rent its transportation and/or distribution infrastructure and associate to make new infrastructure. Also under Decree 841 it authorizes private initiative to build the new high conversion refinery on the coast of Ecuador.
This measure to lift or dismantle subsidies will allow private agents or Petroecuador in competition can achieve the introduction of natural gas either via LNG, via mini LNG from Peru or by pipeline from Peru in order to lower costs and improve the level of pollution versus burning diesel or other fuel oil in thermal plants, industries or businesses. No doubt that LPG is missing but it is a remarkable progress what Lenin Moreno
*Former Minister of Hydrocarbons of Bolivia and current managing partner of Gas Energy Latin America