Nationalization of Oil Industry in Argentina - Essay Example

?Nationalisation of Oil Industry in Argentina Introduction Minder s that Argentina, like many other South American countries, is endowed with vast amounts of oil and gas reserves. Despite its potential, Argentina remains one of the countries that depend much on oil imports from other countries. Argentina is reported to have found itself in this unfortunate situation following the privatization of one of its largest oil and gas companies, YPF Oil and Gas Company, in the 1990s (Minder 2012). YPF was later on sold off to the Spanish company Repsol. However, Argentina has been forced recently to reverse its earlier decision to privatize the company by nationalizing 51% of YPF (Minder 2012). This move has been met with a lot of fury from Spain and other major stakeholders who are strongly opposed to move if media reports are anything to go by. The nationalization has been termed a forced purchase. As a result, the Argentine government is required to pay for Rapsol shares. Tracy (2012) reported that the Argentine government made such a move because of Rapsol’s continued failure to invest in gas and oil production in the country, a scenario that has forced Argentina to over-rely on imports to keep up with its high internal demand. For instance, Tracy (2012) reveals that Argentina spent over $9.4 billion in 2011 to import energy from other countries. This was despite the fact that Argentina is considered one of the countries with the largest hydrocarbon reserves in the world. The privatization of YPF snatched away the control of the government over oil and gas usage in the country. It is important for the Argentine government to understand that nationalization of oil supplies in the country has both its advantages and disadvantages. Advantages of Nationalisation to Argentine Government Oil and gas are commodities that contribute massively to the development of the economy of Argentina. As such they are products that should never be in shortage especially now that they are on high demand almost throughout the year. The Argentine government needs to ensure that no shortage of gas and oil is experienced in the country for their economic importance and therefore needs to be in control of the supply of the commodities. One of the main advantages of the move by the Argentine government to nationalize YPF is that it will give the government power to control how gas and oil is utilized in the country. Privatization takes these powers away from the government as has been the case since the Argentine government privatized YPF by selling it to the Spanish company, Rapsol. As Tracy (2012) states, the privatization of this YPF gave Rapsol absolute control of how gas and oil are used in Argentina. However, since Rapsol has not been able to adequately invest in equipment to boost productivity as was expected, Argentina has had to depend on energy imports from other countries, this despite its massive potential to produce its own energy. Nationalizing the company will give the argentine government control over the country’s oil and gas resources thereby enabling the government to invest in the petroleum industry and hence reducing its dependency on oil imports. Secondly, nationalization of the company will be of great advantage to the Argentine government in the sense that it will enable the Argentine government to be able to invest heavily in its oil and gas reserves so as to increase the production of oil and gas in the country. Doing this will enable the country become energy sufficient and avoid or reduce its import of energy as noted by Porter (2001). This is based on the fact Argentina is one of the countries that experiencing high-energy demand in the country. However, just as Tracy (2012) pointed out, privatisation of YPF interferes with the sector that used to supply much of Argentina’s gas and oil. As earlier indicated, Argentina spent over $9.4 billion dollars in 2011 alone because of energy shortage in the country. However, a closer look at what caused this shortage points at the inefficiency of Rapsol to invest in energy in the country as noted by (Minder 2012). Therefore, by snatching it this control, the country will be able to increase production efficiency and thereby boosting the country’s economic situation. The move by the Argentine government to nationalize the company will also be of great benefit to citizens. This is because it will avoid the over-exploitation of the public by private companies. Generally, private companies tend to charge exorbitant prices for their products and services as compared to government-owned companies. This has particularly been the case in Argentina since the privatization of YPF Oil and Gas Company as noted by Minder (2012). This is because a private company’s main aim is to make as much profit as possible. This is not the case with government-owned companies which mainly aim at providing vial services to the people. As a result, the nationalization of YPF by the Argentine government will help reduce the prices charged on energy (Tracy 2012). This will be of great importance to the Argentine government in the sense that it will help restore consumer confidence in the government. This is because Argentines will start seeing government leaders as people who care for their welfare by ensuring that they are not exploited by the private firms in the country. Finally, nationalization of oil and gas companies in Argentina will help in environmental management (Tracy 2012). Oil and gas industries are among the industries that cause a lot of pollution of the environment. This is especially the case when the situation is left in the hands of the private players which may not be concerned by the impacts of their activities on the environment. Worth noting is that the world is currently grappling with how to reduce greenhouse emissions to the environment (Falola and Genova 2005, p.26). One way through which Argentina can control the level of greenhouse emissions to the environment is by nationalizing YPF. Disadvantages of Nationalisation As much as the move by the Argentine government to nationalize the oil industry may be beneficial to the country, the strategy also has a number of negative consequences. The first major disadvantage with such as the move is inefficiency associated with government projects (Falola and Genova 2005, p.34). This is because government employees do not always work hard to ensure efficiency in service delivery given that state corporations are not always geared towards profit making. As a result, the nationalization of Argentine oil industries may prove worse than if left under the control of private sectors that are profit driven. Falola and Genova (2005, p.36) note that nationalization also decreases the competition, which is vital for increased productivity and efficiency. Competition is always very important as far as efficiency in production and service delivery is concerned. This implies that if the Argentine government continues with the move to nationalize its energy sectors, then there is a high likelihood that the country may end up running short of oil and gas, which may make matters worse than the situation was in the past. Nationalization of the energy industry by the Argentine government is likely to increase corruption in the country, which in, turn, may compromise the quality of service delivery to the people. This is because government agencies have the tendency of employing people who are somehow related to current employees or high ranking officials regardless of their ability to deliver quality services (Falola and Genova 2005, p.37). In this regard, it will be detrimental for the Argentine government to continue with such a strategy. Major issues faced by the oil operators (mainly Repsol that is the major operator in Argentina) as a consequence of the Nationalisation The move by the Argentine government to nationalize YPF has had serious consequences on major oil operators such as Repsol. This is because the nationalization took away part of these companies stakes. The move has seen Repsol, for example, register significant reductions in its profits since the nationalization of the company was effected (Buckley 2009, p.307). This is because it reduced Repsol’s production by several thousand barrels. At the same time, the nationalization affected investor confidence in the company that has seen its shares trade poorly in the market. This again has resulted in a reduction in the profits made by Repsol. Repsol has moved to court seeking compensation from the Argentine government for the losses incurred as a result of nationalizing YPF. Minder (2012) reveals that Repsol is seeking damages to the tune of $10.5 billion. Peterson Group has also faced a similar problem since the nationalization that took away about 26% of its stake. The company has been making losses since the government decided to nationalize YFP (Petroleum Economics 2012). Apart from Repsol and the Spanish government, some countries have threatened sanctions against Argentina for making such a move. This is because such a move is also likely to affect other foreign-owned players in the country’s oil and gas industry. If the Argentine government continues with such a move, it will scare away foreign investors in Argentina. It will be perceived that the Argentine government might try to influence their operations in the country for its own benefits (Minder 2012). Conclusion Despite the criticism that have been leveled against Argentina for nationalizing YFP, the move is good for the country and will help Argentina recover from the kind of economic decline that it has experienced since the privatization of the company. The privatization of industries has not only affected Argentina, but several other European nations as well. Greece, for example, has suffered a serious recession as a result following the f privatization of many its industries. Therefore, nationalization is the right strategy that will help Argentina recover from the economic decline that the country has been witnessing over the past few years. References Buckley, P. (2009) “Business history and international business”, Business History, vol. 51 (3), pp. 307-33. Falola, T., & Genova, A. (2005). The politics of the global oil industry: an introduction. Oxford: Greenwood Publishing Group. Minder, R. (2012). “Spain Stings Argentina Over Oil Company Nationalization.” New York Times, April 20, 2012. http://www.nytimes.com/2012/04/21/business/global/spain-stings-argentina-over-nationalization-of-repsol-ypf.html?_r=0. (Accessed on 14 March, 2013). Petroleum Economics (2012). “After the nationalization, Repsol recovers while YPF struggles.” http://www.petroleum-economist.com/Article/3116458/After-nationalisation-Repsol-recovers-while-YPF-struggles.html (Accessed on 14 March 2013). Porter, M.E. (2001), Innovation Matters. SLOAN Management Review, Summer, 28-36 Tracy, M. (2012). “Viva Argentina! Why it’s right to nationalise companies for its interests.” Liberal Conspiracy, April 19th 2012. http://liberalconspiracy.org/2012/04/19/viva-argentina-why-its-right-to-nationalise-companies-for-its-interests/ (Accessed on 14 March, 2013). Read More