May 2020 – @alvaroriosroca – Prolonged energy subsidies end up being disproportionately perverse to economies and societies. 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.
These subsidies take their toll sooner or later and they do so naturally when oil and energy prices as a whole are high in the international context. This is not the case at present, which is why it is time to phase them out, as we will explain later.
The economies of the countries suffer because they see their coffers bleeding, state enterprises collapse and the fiscal deficit rises like foam. When it is time to make adjustments and raise subsidies, citizens and entrepreneurs are not prepared to receive them at once and very deep social, political and institutional crises occur.
Energy subsidies also foster inefficiency and loss of competitiveness in the long term. When prices are kept artificially low, no one values or preserves them and consumption is disproportionate. There is no signal to take energy efficiency seriously and wastefulness is the way forward. As an Argentinean said, open the window that is very hot here, that when it was heated with derisory gas prices.
Those who benefit most from subsidies are the rich and wealthy. Families with two or three or more vehicles, those who travel constantly, those who have heated swimming pools and many other energy-intensive pleasures. Therefore, those who have less, those who walk, take the bus, ride the subway, and live in a humble room, end up subsidizing those who have more economic resources.
Strong energy subsidies for prolonged periods also lead to shortages as is the case in Venezuela and Argentina. Investments in electric energy generation and hydrocarbon exploration are driven away and finally, they end up being imported. Public transport and distribution services deteriorate and are not expanded to the detriment of their citizens. Nor does it allow the entry of new and efficient technologies in competition, as is now the case with solar or wind energy.
Many keen populist scholars argue that sustaining subsidized energy prices is an incentive for economic development and growth. This is not true. For example, countries like Chile, Peru, Paraguay, Uruguay, Costa Rica, and others that have not practiced subsidies have led and continue to lead economic growth and greater social stability in the region. Their citizens and business people have become accustomed and adapted to the fluctuations in energy prices. While we watch Venezuelans today paying for the most expensive gasoline on the planet on the black market (12 USD/gallon or 3 USD/liter) because it does not exist. Let’s also remember Argentina a few years ago importing the most expensive natural gas on the planet at 18 USD/MMBTU.
We sincerely believe that it is the right time to make energy prices honest now that international prices allow it. A government with statesmen would do it without thinking twice, as the Minister of Ecuador supported by its President Lenin Moreno wants to try to do. We really wish him every success because it would be a step forward for the medium and long term of his economy and the country as a whole.
The countries that still maintain deep subsidies like Argentina and Bolivia for example should think that it is the ideal moment now that we have and will have very low oil and energy prices for a few more good months. For example, a price flotation system could be devised with floor and ceiling protection bands and much more.
Finally. The big difference is that populist politicians are short-sighted and only look around the corner, because they are not interested in the country and only in staying in power. Statehood politicians are those whose concern is not to seek re-election or to remain in power and instead look to the long term and what is best for their country. If you don’t believe us, ask Venezuelans and Argentines about this important issue.
You always have the last word dear reader.
*Former Minister of Hydrocarbons of Bolivia and current managing partner of Gas Energy Latin America