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Latin America Advisor

The Industrial Union of Argentina (UIA) said last month that the country's current energy crisis has hurt some 5,000 businesses through restrictions on the supply of gas and government orders to reduce electricity consumption. Will the toll of the energy crisis on Argentine industry be the catalyst for new policy initiatives to attract investment and boost energy supplies? What steps will President Nestor Kirchner take to address the crisis?

Francisco Mezzadri, President of Francisco A. Mezzadri & Associates in Argentina, and specializes in economics and energy: President Kirchner will not address the crisis with new policies. He just said he will keep tariffs frozen and that he will not order energy rationing at the residential users level. So, part of the burden of higher costs of energy and energy rationing will still be supported by the industrial sector, which is already showing signs of growing stress. The remaining part of those higher costs will continue to be paid by the fiscal sector. Large distortions of relative prices will end up deeply affecting energy supplies and economic activity, while investor expectations are under yellow lights, since convergence of lack of power generation capacity and lack of natural gas was well understood. Argentina's energy sector faces a difficult structural problem, and announced government policies will not be enough to cure a continuous shortage of energy for a long period of time. The most important expectations for power generation and natural gas availability today rely heavily on the uncertain capacity of Bolivia to supply large volumes of gas in two years' time. From a rational standpoint, policy changes should come sooner rather than later. Perhaps that will happen once the presidential election process is over this October.

Federico Thomsen, Head of E.F. Thomsen economic consultancy in Buenos Aires: The current energy crisis should not come as a surprise to President Kirchner, since specialists have warned about it repeatedly since at least 2004. For Kirchner, voter (that is, residential consumer) sentiment was the priority, and it is even more so with presidential elections scheduled for October 28. This priority rules out higher rates or any form of 'demand management' for residential energy use. Higher rates would help attract much-needed investment, but the new energy capacity would only come online in two-three years, whereas consumers would feel the pain now. Therefore, Kirchner is likely to try to muddle through to the elections without major changes. Voters may not punish his wife, his presidential candidate, for the energy problems, since by late October the winter's cold peaks will be behind, and the summer's heat peaks will not have arrived, these being the times when the energy infrastructure is under most strain. The key question then is if Kirchner will adopt unpopular measures sometime between the election date and his wife's inauguration as president on December 10. He would be doing her a favor, since by that time the summer will be just about to start. Unfortunately, it is not clear that he will do so.

Isabella Alcañiz, Assistant Professor of Political Science at the University of Houston: Argentina is struggling to meet its high energy needs, due to its fast-growing economy and a winter much colder than expected. President Kirchner has decided that the brunt of the crisis will be carried by businesses and industry. The existing shortages threaten the sustained supply of natural gas and electricity this winter to both residential and commercial properties. The investment required to bring up to par the generation, distribution, and supply of energy for Argentina's growing needs is monumental and long term. Not surprisingly, the current administration does not appear to have much incentive in pursuing partnerships with energy investors. And at a time when the president's wife announced her candidacy for the 2008 presidential election, in lieu of the president seeking re-election, a quick solution is needed. Thus, the administration has opted for the short-term strategy of relying on its neighbors for over-priced Bolivian natural gas and Brazilian electricity—a strategy somewhat economically expensive, but politically costless. It would seem then that President Kirchner's short-term policy is to weather the crisis with a little help from his friends. His long-term policy (with a Cristina Kirchner government in mind), perhaps, will be to bet on global warming for Argentine winters to become warmer and warmer.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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