How Argentinian Government Decision Can Affect the Prospective Activity of Oil Operators - Case Study Example

Author’s name: Professor’s name: Subject: Date: Nationalization of the oil industry Abstract In this paper, we examine nationalization of the oil industry in Argentina. Governments are more likely to nationalize oil when prices are high. They are also more likely to nationalize oil when political institutions are weak. Nationalization may be inefficient but does not occur in equilibrium when the prices of oil are high. Nationalization has a likelihood of happening when quality of institutions is low and when prices of oil are high even controlling for country fixed effects. The future of the oil industry has changed. Oil prices have moved to an alarming high level. New technologies are providing diverse as well as uncertain opportunities for the production of conventional oil in several parts of the world. Introduction Nationalization of the oil industry is the process of de-privatization of oil industries including operations. Recent years have brought up and back a phenomenon of forced nationalization of the major oil assets owned in a foreign land. Nationalization has become a major problem for many international oil companies. Nationalization has sometimes caused losses in output. It can also cause loss in the national income for countries that specifically depend on oil. It has been noted that nationalization of oil companies takes place when the prices of oil are high. In the 1980s and 1990s, oil prices came down. This is the time when nationalizations disappeared. They only re-appeared or re-emerged in the last decade when the prices started climbing back to their previous levels. It appears natural that the higher prices of oil, the more valuable oil assets become, and the stronger the nation’s incentives are to expropriate. Content Argentina’s attempts to re-nationalize the oil industry came after accusations of Repsol for being responsible for the decline in production. Since the year 2000, Argentina’s oil production decreased by approximately 3 percent a year. This means it reached 650,000 barrels in a day in 2010. This was a drop from 815,000 in 2000. Demand for the product is now increasing rapidly every year and a fall in gas output made the situation worse. Argentina has attempted to justify the re-nationalization because of the fall in oil production. The fall has been nearly 40 percent since its acquisition by Repsol. Repsol argued that the move to renationalize was discriminatory. Repsol has been a long-term victim of government as far as productivity is concerned. The move has had an impact on the oil industry in Argentina. It is, therefore, necessary that we distinguish between international and national oil companies. Private companies often have access to the smallest share of the world’s reserves of hydrocarbon. This is despite the fact that their production relative to the reserves is higher than for national oil corporations. They intensively exploit, which means that the decline of their natural fields will set in early (Mabro 6). Their small yet rapidly declining reserves prove the point for the urgency of their quest to access new resources. They are, however, affected by many factors. The major factor that constrains is nationalization. National oil corporations are different from one another, especially as far as capabilities and resources are concerned. Some are not able to manage or undertake projects. Others suffer from managerial deficiencies, from lack of skilled workers and financial constraints (Mabro 6). Argentina has great and vast oil deposits hence it requires higher investment levels if greater development is to be realized. The government believes that, by nationalization of the company, Argentina’s deteriorating economic condition as well as rising fiscal deficit will be aided. The decision to expropriate the company’s share is bound to negatively influence foreign investment decisions in the country. The government needs to continue investing and continue improving the regulatory framework in order to turn resources into reserves. The oil company in particular will face borrowing costs that are higher than expected. The government may claim that production is showing short-term achievements, however, the influence of the state is bound to direct capital higher borrowing costs. A tights market is likely to make development and exploration more costly. This is evident even in the midst of growing demand and competition. Competition is a real and present threat to the demand for oil (Mitchell 14). The long-term trend prediction will not be possible on the basis of business-as-usual extrapolation. Investors constantly look at the industry, to see how it responds. The government will then strive and struggle to catch up with development despite the uncertainty of investing in the country. Other countries do not doubt the Argentina’s oil potential, but the rules are changing constantly and risk aversion is significant. The uncertainty may deter investors even in the wake of resistance by Repsol to nationalize the company. The country’s ability to realize its potential is inevitable. It will require serious reforms especially to its regulatory structure and energy policy. Without the major reforms, the country will be disappointed especially because of their assumption that some investors are eager to invest. Nationalization of oil has advantages even with the presence of arguments that oil production capacity will still be great in the absence of oil nationalism (Mabro 6). Despite the need to nationalize the oil industry, the government has to be able to secure its supplies. Many do not consider nationalization of the oil industry an advantage. There are several reasons that support the thought. There is a lot of bureaucracy in nationalized industries. This means that there is rigid and extensive procedure of the state resources. Such procedures and rules makes the process of production complicated resulting in loss or delay of initiatives. There is also limited investment. Many investors are skeptical about investing their money due to the risk of nationalization. Volumes of investment remain in the private sector rather than in a public sector. There is a lack of efficiency in nationalized industries. The reason for this is that salaried individuals who are less efficient are the ones who manage many of such industries. Decision-making is also a major concern since certain people decide all major matters. Conflicting views make urgent decisions difficult to make, and that could be dangerous for the business. The oil industry is becoming more competitive, and such disadvantages should not be allowed to rule the company. Sound decisions have to be made in a company that is competing in a volatile environment. Oil majors often face limited chances even in the wake of national oil companies becoming qualified national operators. Nationalization can mean the ability to draw on the expertise of service companies in order to fill technological needs, build skills and acquire small companies to access skills and technology (Mitchell 50). Argentina should turn their attention to those areas that are dominated by national operators. Nationalization of industries is not a new phenomenon even to Repsol. The phenomenon has been available for some time, and Repsol chose to accept it even as others chose to fight. The acceptance became necessary because the nationalization hinders creation of monopolies, which are usually created when wealth goes to few people. A country’s revenue will increase because of remittance of revenue. Private industries often avoid income tax, but nationalization will ensure economic growth. Nationalization of the oil industry has been seen as a tool of the country’s strategic and foreign policy. National oil companies are required to heed the strategic and foreign policies of the government. Such industries are often used to form alliances, and they participate in the nation’s politics. The top management of the nationalized industries has goals, and they use the companies to increase their power. There has been a huge shift in investment focus to the unconventional reserves found in the west will play a major role in the long-term (Mitchell 51). Lack of choices could force the Argentinean government to invest in technological edge hence playing to their strengths. This could affect activities of oil operators as well as other foreign firms that are in the country. I suggest that the country pursue the strategy because, in the end, the country benefits as compared to the situation where the oil industry is left as a private company. The disadvantages may be many, but the few advantages outweigh them. Conclusion Argentina is at the crossroads. The fundamentals are adequate and may seem favorable, but the nation is on an economic collision path. The re-nationalization of the oil industry could mark a tipping point in a down economic spiral. The macroeconomics of the country have been hurting for years now, but recently, government policies have been able to confirm the fears of investors. To restore the country’s reputation as a suitable investment zone, the government has to affect a high degree policy turnaround. The turnaround can only be achieved by paying for the expropriation and settling the score with Repsol. The quick settlement is to Argentina’s advantage instead of going the legal way. The government should also honor outstanding debts owed to private creditors as well as honor commitments under the international law. The turnaround will also be achieved by laying out transparent and clear regulatory infrastructure. This is the only way that the Argentinean government can develop and grow the initiative hence, in this case, the re-nationalized oil industry. Works cited Mabro, Robert. Oil nationalism, the oil industry and energy security concerns. Area: International economy & trade- ARI 114/2007. Web. Mitchell, John. What next for the oil and gas industry? The Royal Institute of International Affairs, 2012. Web. Read More