In the book
Oil income in Argentina
(Eudeba-2021), we maintain that oil activity can be analyzed as a business of appropriation and distribution of income.
Income arises from the difference between prices and costs.
If there is no income to appropriate and distribute, there is no business and there is no investment.
In the book we prove with empirical evidence from data from Argentina that when the mechanisms of appropriation and distribution of income that decided the investment are altered, either by establishing internal prices divorced from international prices, or by creating new taxes (withholdings) that affect income appropriable, exploration falls, proven reserves fall and production falls.
From the point of view of oil microeconomics then, the objective of maximizing oil income is aimed at maximizing investment in the industry and internationalizing the domestic market.
The reform to article 6 of hydrocarbon law 17,319 proposed in the omnibus law seeks to crystallize this principle in tension with the priority of internal self-supply until now in force.
Let's analyze the potential conflicts.
If the domestic market is not self-sufficient because domestic oil production does not cover demand, the reference prices will be governed by import parity and economic rationality dictates selling the oil in the domestic market instead of trying the external business subject to a export parity that implies less price.
Article 6 of 17,319 itself (still in force) establishes that if internal prices are set for the marketing of domestic crude oil, those prices must reflect the parity of importing the crude oil.
The problem comes if international prices rise a lot and you want to maintain lower domestic prices, setting them at the level of the “operating costs of the state company.”
Here we find the first tension between a, let's call it, “criollo barrel-1” that seeks to redistribute income from upstream producers to downstream market actors, and the income-maximizing objective that advises maintaining the alignment of domestic prices. with international ones to maximize national production and investment.
In any case, the impact on fuel of this increase in the international price of crude oil can be mitigated by reducing the tax component or creating a countercyclical stabilizing fund.
Next, Article 6 legislates on the authorization of exports under the implicit assumption that the domestic market is self-sufficient.
Two new tensions may arise.
If the country has a surplus and has surpluses, with rising international prices comes the fiscal temptation to appropriate income via withholdings.
The withholdings on the export barrel lower the price references for the barrel that is sold internally - “criollo barrel-2” - and discourages investment to maximize Argentine oil production and income.
There is an appropriate rent transfer upstream to downstream actors (the fuel consumer if pump prices fall).
But the other case of tension, which many overlook and perhaps did not pass through the spirit of the legislator in the drafting of art.
6, is one in which there is a significant drop in prices in the international market with an impact on the income to be distributed.
If the objective of self-sufficiency predominates over that of maximizing income, prices for the domestic barrel can be set higher than the international ones: “criollo barrel-3”.
Here it is the consumers who subsidize the producers by paying domestic prices higher than the international reference prices.
It is clear that guided by the objective of maximizing income, a drop in international prices impacts a drop in reserves and production, and it is possible that imports will have to be made again, unless work is done on the other component of the definition of income: costs.
By lowering costs, break even price references (prices that allow total costs to be recovered) are lowered.
The objective of income maximization also implies a constant technological challenge.
Colophon: the watershed between the objective of self-sufficiency or income maximization responds to extra-economic criteria, whether political and/or strategic.
The economic arguments favor the objective of maximizing oil income with internal prices aligned with international prices.
Furthermore, the objective of internal self-sufficiency can often force the unwanted and discretionary coexistence with “criollo barrels.”
Former Secretary of Energy and former president of YPF