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Home | Blog | Turning Rich Natural Resources Into Scarcity, Part 2

Turning Rich Natural Resources Into Scarcity, Part 2

April 27, 2012
There is word of more capital destruction in South America.  It’s hard to keep up with the Chavzes, but down Argentina way, President Cristina Kirchner announced that her government is seizing a majority stake in oil company YPF SA, owned by Repsol YPF of Spain, the largest oil company in the world.  The New York Times reports from Rio De Janeiro, The expropriation would reassert state control over an important pillar of Argentina’s economy, but it has already increased diplomatic tensions with Spain and the European Union. Mrs. Kirchner quickly ousted Sebastián Eskenazi as YPF’s chief executive, naming two top aides, Julio de Vido and Axel Kicillof, to run the company. Argentina’s government founded the company in the 1920s and it was then privatized in the 1990s.  She says the taking of YPF is a “recovery of sovereignty and control.” She said the move would allow Argentina to raise production, after the country recently became an energy importer. The people of Argentina are all about the seizing.  Because of price caps and other regulatory uncertainty, supply is not keeping up with demand.  The government has pressured YPF to increase production and threatened to revoke its oil field concessions, but the price caps make increased production uneconomic. However, Kirchner’s deputy economy minister, Axel Kicillof, told the Senate, "It's a common practice of the producer [or] exporter that he holds back production, the treasure, because they have a chance to obtain a higher price," Kicillof has a doctorate in economics from the University of Buenos Aires, where he won a faculty prize in 2006 for his thesis on John Maynard Keynes's famous work, "The General Theory of Employment, Interest and Money." So it’s not surprising that in his testimony to the Senate, he included,  "When there's a crisis, the worst thing that can be done is to say the state is the problem. The state is the solution. When there is recession and economic crisis, the state becomes a key actor to revitalize demand and investment." There’s already too much government mucking things up in Argentina, but the 40-year-old minister, described as  "Attractive, good dad, geek and brain behind the expropriation of YPF," provides the thinking behind  Kirchner’s imposition of new restrictions on foreign-currency transactions and tightening of import controls. In her prior term, she nationalized private pension funds and the flagship airline.  "We're giving YPF to the same kids who bankrupted Aerolineas," quips Congressman Omar de Marchi. YPF thinks it’s only fair that the government pay $10 billion for the majority stake, but Mr. Kicillof, according to the Wall Street Journal, “scoffed at that figure, saying compensation determines on what a federal tribunal decides after it evaluates YPF, including possible environmental damage. ‘Let's see what we will find when we open the black box,’ he said.” So what are the prospects for investment in Argentina? “I worry less about Apache’s operations in Egypt than in Argentina,” said Fadel Gheit, a senior oil analyst at Oppenheimer & Company in New York.  “The oil industry in Argentina is just getting ready to take off, but this may be a way to kill it in its infancy.” “You have to be clever to do business in Argentina,” Federico MacDougall, an economist at the University of Belgrano in Buenos Aires told the NYT. “It was hard to do business in Argentina before. Now it is even harder.” Capital goes where it’s treated best.  When the capital leaves, the people are left to starve.

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