By Álvaro Ríos, former hydrocarbons minister of Bolivia and current managing partner at Gas Energy Latin America.
In our previous column, we explained why prolonged subsidies for energy and hydrocarbons in particular end up being perverse for economies and societies as a whole.
Successive governments around the world and in Latin America, mostly of a populist nature, have introduced or maintained subsidies, sometimes with very noble intentions, but more often than not just to seek votes and stay in power.
We have shown that subsidies make countries’ economies suffer because they see their coffers bleed, state companies collapse and the fiscal deficit balloons. Subsidies promote inefficiency, loss of competitiveness, waste in the long term (gasoline in Venezuela) and finally it is the wealthy who are most favored.
Prolonged subsidies also lead to shortages, as is the case in Venezuela and Argentina, for example, because investments are discouraged and new and efficient technologies, such as solar or wind energy, are not allowed to compete.
We sincerely believe that now is the right time for various countries in the region to lift subsidies, taking advantage of low international prices for oil, natural gas and derivatives. As we said, a government that adopts a statesman-like approach (and not a populist one) would do it without thinking twice. And this has been done by President Lenín Moreno of Ecuador, with the help of his energy minister, René Ortiz.
President Moreno understands very clearly that the subsidies that were applied to various petroleum products are perverse to the economy of his country. In October 2019, he faced violent protests for trying to eliminate them abruptly and he had no choice but to back down, because the social protests of citizens (which were justified) were mixed, as always, with political factors related to the previous government.
However, with intelligence and being very well advised, the government has modified the regulation on setting prices (No. 1054) to allow the reform of fuel prices, letting the private sector import fuels at international prices. In other words, it is no longer Petroecuador (its state downstream company) that sets prices discretionally based on social or business pressure.
Now that the prices of gasoline and diesel are low on the international market, Ecuadorans do not suddenly feel the effects of the measure and rather have begun to receive the benefits of lower prices. What is more important is that they are getting used to prices fluctuating with the market (as is the case in Peru, Brazil, Chile and other countries). When the prices of oil and derivatives are rising, Ecuadorans will no longer have to suffer the so-called gasolinazos, gasazos or dieselazos that have led several presidents of the region to lose popularity and even the presidency.
Petroecuador will now be able to purchase domestically produced oil at the market price or import it for processing at one of its three refineries. And it will have to compete with imported products. Petroecuador may rent out its transportation and/or distribution infrastructure and form partnerships to develop new infrastructure. Also Decree 841 authorizes the private sector to build the new high conversion refinery on the coast of Ecuador.
This measure of lifting or dismantling subsidies will allow private sector players or Petroecuador to compete to introduce natural gas via LNG, mini LNG from Peru or by pipeline from Peru, in order to lower costs and reduce pollution levels compared to burning diesel or other fuel oil in thermal power plants, industries or businesses. Without a doubt, LPG is lacking, but Lenín Moreno is a notable advance.
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