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The Argentine government has gone back on a promise to cut crude oil prices, after last week it emerged it had reached an unofficial agreement with oil producers and refiners to cut prices at the wellhead in order to trim the gap between local and international crude prices and make life a little bit easier for refiners. The cut would have been by 2 percent a month over the next three months.
The oil industry got on board with the proposal, agreeing to put a ceiling on retail fuel prices in exchange. Prices at the pump have jumped 31 percent since the start of the year in Argentina, together with a 35-percent devaluation of the local currency. The devaluation followed the removal of capital controls, undertaken by the new government.
As Omar Gutierrez, the governor of oil-rich Neuquen region, said following a meeting with stakeholders in the oil price issue, “The national government does not have in its agenda any type of decrease in the subsidy.”
His words were echoed by Neuquen senator Guillermo Pereyra, who is also leader of the local oil workers’ union. Perreyra added that “A technical energy committee will be formed where the provincial government, producers, unions and the national government will participate.”
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Crude oil prices in Argentina are being held artificially at levels higher than those on international markets in a bid to stimulate the industry and avoid large-scale job losses. The subsidies also aim at controlling inflationary pressures that have seen Argentina record an inflation rate of 46 percent in the 12 months to July.
As the deal fell through, local oil producers will continue to get US$67.50 for each barrel of Medanito crude they sell to local refineries and US$54.90 per barrel of the heavier Escalante blend. This is 10-12 percent lower than prices were in January, thanks to a cut the new government, which came into power last December, implemented.
Opposition to the removal of subsidies was expected: communities in Argentina’s oil-rich regions depend on the royalties that international oil producers pay for the crude they pump there. This leaves refiners at a crossroads: if they can’t get oil cheaper, they would have to sell their products at higher rates, which excludes lowering prices at the pump.
By Irina Slav for Oilprice.com
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Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.