Nationalization of the Oil Industry in Argentina between 1960 and 2006 - Coursework Example

Topic: Name: Lecturer: Course name: Course code: Date Abstract This report explains the nationalization of the oil industry in Argentina between 1960 and 2006. It empirically and theoretically shows that the government of Argentina nationalizes especially when the prices are extremely high. It also nationalizes in occasions when there is weak political stability in the country (J. Barkley Rosser, 2004). The report therefore looks into a simple vibrant model of the relationship between the local government and the foreign oil investment companies. Although the issue of nationalization is neither effective nor efficient, it happens in equilibrium when prices of oil are extremely high. The predictions of the report concur with the analysis and reports released from nationalization data in the world oil industries since early 1960s. Nationalization usually occurs when the global oil prices are high Also when the management and quality of the concern institutions are relatively low to an extent of not able to control the country. Introduction In the past few years, an issue arose that has never been experienced for several years: nationalization of oil industries. For several years, nationalization has been a serious problem for various oil producing countries in the world. In fact, it has been hard to suggest the role of national oil companies as a research report dictates (Taylor, 2012). Most of the worlds’ producing companies have left behind billions of money invested in oil deposits. This is because of communication breakdown between the government and the oil companies. Forced nationalization has been linked to one of the frequently asked question in management and economics: incase the property rights are very crucial for economic development, why is it not easy to adopt? Theoretically, this implies that if the government does not pay much attention to oil production, then it should dispose its assets to meet its threshold. Essentially, the literature about privatization implies that transforming to private entitlement enhance productivity. Nationalization has been associated with a lot of losses in income and output efforts in countries depending majorly on oil. One of the key observations in Argentina is that nationalization took place at the time of the financial crisis i.e. when the prices were extremely high as shown by the graph below. Nationalization of oil supply This refers to de-privatization of the production of oil operations mainly for the purpose of getting more revenue from the product for the producing countries (Abdelal, 2011). Nationalization eradicates the system of concession whereby the private world companies take control of oil resources in the producing countries allowing them to regain their control. Once these countries are independent of their products, they devise ways of maximizing the profits. However, the whole process is associated with a lot of implications. For instance, the local oil industries are separated from their national anticipations in that they should carry their own flag to realize the success, an idea which might put them into greater risk (Warren F. Ilchman, 2004). Following the report released from the Repsol Company, it is clear that only 8 percent of the world’s expected gas and oil reserves are within the nations which permit free rein of private international companies. Reasons for nationalization Exploitation The first contracts which were held among oil companies and oil producing countries were unfavorable to the countries that initially produced. The fixed contracts, which were unaltered covered vast lands and took very long time to extract. The nationalist realized they were being exploited by oil companies. Venezuela was the first country to act. The country doubled its royalties and tax paid of their total income. Nevertheless, no equilibrium sharing was reached. Since oil firms could make deductions from the income tax, the acquired profits by the oil companies made no significant change thus the oil firms experienced no problems at all. Even with escalated oil prices, the oil firms still maintained stable position over the country (Tucker, 2010). Strategic control Initially, countries rich in oil were enslaved with poverty and suggested to oil companies to provide support in managing the oil deposits situated in the country. Nevertheless, as these countries started developing, revenue demands also went up significantly. The oil industry became amalgamated into the native economy that demanded strategic control by the mother country on production rates and pricing. Progressively, the foreign investors doubted the oil producing countries because they demanded active participation in the management and control of oil in the country. Growth of the oil industry One of the scholars reiterated that during the Second World War, the international petroleum companies were very strict on the oligopoly which had taken roots by several world oil producing companies. Twenty years late, several other private companies had ventured into the industry inspired by the increase in oil consumption and reduced entry barriers. These new companies dislocated the stability of other existing companies and the producing countries. As a result, other countries joined in because of good terms. Change of structure of oil processing countries The world war III underwent through a dynamic change between the time of oil discovery and ten years later. The rise in nationalism and the materialization of joint group consciousness between the developing countries marked the end of colonialism (Taylor, 2012). This was articulated through the formation of Oil Producing and Exporting countries (OPEC). This association promoted close communication links between the oil producing countries. In turn, this led to escalated mentality of nationalism that brought changes in Argentina. Increase in capabilities The technological advancement, managerial expertise and innovations increases drastically which enhance the purchasing power of the country (Nasrawi, 2011). Furthermore, increase in bargaining power proportionally allows Repsol to alter its strategies. This helps in expanding its abilities to promote the economy of the country. Benefits of Nationalization Growth of the economy Indeed, nationalization has a lot of benefits toward the economic development. By taking over the management and control of the country’s natural resources, the government can easily take control and supervise the utility of such resources in such a manner to optimize its role towards the growth of the economy. Employment opportunities Nationalization creates job opportunities among different citizens (Warren F. Ilchman, 2004). This helps in promoting the standards of living through equal distribution of wealth in the midst of the entire population. It improves the income of the miners thus uplifting the overall standards of the country. For instance, if an ordinary employee earns a salary of $200 but another worker of the same job group earns $350 in the mining sector, then an ordinary is being exploited. This gap can be closed if the government employs a successful nationalization of the oil industries. Diversification Nationalization promotes diversification in the country in that if the government employs the program, the other private sectors would branch out to other economic sectors e.g. I.T or manufacturing. These sectors, which might have been neglected, would receive a greater attention and investment. This is because the private sectors would pump in a lot of money in them thus creating more job opportunities and eradicate poverty. Furthermore, several developing countries have primary sector and driven economy. Incase the government nationalize such primary sectors like mining, then the private sectors may concentrate on key issues and services that may promote industrial development. Increased productivity According to developmental economist, they maintain the fact that for effective change from developing to developed country, there is need to have high exports level (Nasrawi, 2011). Most of the scholars have concurred that industrialization is closely related to high income and productivity and is a trademark of modernization and the national power of economy. Disadvantages of Nationalization Monopoly The government is enslaved to monopolize the national resources that it controls. Due to lack of competition in nationalized firms, this would lead poor outcomes and price distortions, inefficiency and over/under production due to poor marketing strategies in place. What drives the efficiency of the market are the competitive forces of demand versus supply. This may lead to low costs and quality production. From the past experiences from other countries, especially those that have nationalized its industries, it is evident that heavy losses and inefficiencies are ploughed back to public sectors. This is because they lack regulation from the government. Financial Crisis Nationalization with no compensation would cost the mining sector in terms purchasing of equipment. This will result in financial crisis for the country like the collapse of stock exchange markets, heavy losses from pension and retirement holders. This is directly sent a warning to foreign investors who could have otherwise invested in the country. This forces them to withdraw because of no confidence within the country. Brain Drain The is a likelihood that nationalization results in deterioration of brains due to too much demands that is required in the foreign direct investment (J. Barkley Rosser, 2004) (Lynch, 2003). Entrepreneurs and competent professionals are deprived free market incentives forcing them to look for better opportunities abroad. According to the studies done, it is evident that private sectors are more profitable and efficient. Alongside this is the temptation of government bureaucracy as well as the corrupt politicians to crop in. Because motivation is no longer the target, other incentives may accrue in. Effects of Nationalization to other Firms The governments’ decision to nationalize the oil company has arisen a lot of concerns. This is because it would cause high inflation rates that are beyond control and the country would face crises of balance of payments. This would limit the country’s ability to borrow from other countries leading to a poor economy and deeper recession. The affected firms would cut down their employment rates and increase the poverty levels (Adler, 2008). The social expenditure would triple due to adjustments in inflation. The oil production rates would decline substantially. This is directly reflected in the production of other sectors. The production lag is not only a problem to businesses and consumers but also a severe macroeconomic problem. The decline in oil production would lead to increase in imports and other levy charges. A stable balance of trade that has been in existence in Argentina since 2001 would be distorted. This is because the government’s borrowing has been restricted from global markets. Although Argentina is at the cross road on whether to adopt this system, it is clear that it has more benefits from the nationalization that can promote its growth (Abdelal, 2011). It is very interesting that the country has had commendable remarks on economic development for the last nine years. Its success has never been associated with foreign investment, and if any, very little. Therefore, its adoption of nationalization would not alter the economy of the country. Conclusion Oil nationalization has both negative and positive consequences in the country’s economy as a whole. Argentina should weigh out the merits and demerits of the system so as to favor its citizens. Repsol Company should balance its transactions so that it does not exploit other oil firms. The government, on the other hand, should implement sound policies that enable oil firms free market operation and stable oil prices even if the companies are nationalized. Equal market opportunities should be given to private investors to allow free market operation. This helps the Argentineans to appreciate the nationalization policy. Reference list Abdelal, R, 2011. National purpose in the world economy. Cornell University Press. Adler, S, 2008. Economic Calculation in the Socialist Commonwealth. Ludwig von Mises Institute. Alok Goyal, M.G, 2010. Business Environment. FK Publications. J. Barkley Rosser, J.M.V.R., 2004. Comparative economics in a transforming world economy. MIT Press. Lynch, K.L, 2003. The Forces of Economic Globalization. Kluwer Law Internationa. Nasrawi, A, 2011. Arab Nationalism, Oil, and the Political Economy of Dependence. Greenwood Publishing Group. Stacy, L, 2012. Mexico And The United States. Marshall Cavendish. Taylor, J.B, 2012. Economics. Cengage Learning. Tucker, I.B, 2010. Survey of Economics. Cengage Learning. Warren F. Ilchman, N.T.U, 2004. The Political Economy of Change. University of California Press. Yunker, J.A, 2009. Economic justice: the market socialist vision. Rowman & Littlefield. Read More