Before the ascendance of President Javier Milei, the Argentine economy could best be described as being up the creek – the South American nation faced 161% inflation, a shrinking economy and its currency losing about 90% of its value. By comparison, the UK’s ongoing economic stagnation may seem immaterial. Nevertheless, there are lessons to be learnt from Milei’s radicalism, especially when it comes to oil and gas.
Argentina has a deep wealth of natural resources, including oil and natural gas. The Argentinian government has historically controlled the domestic oil prices to help households and keep a lid on inflation. However, this policy has distorted the price mechanism, reduced investment in the sector, and undermined domestic production. Milei has sought to loosen the state’s tight grip on the industry to help boost exports and foreign currency.
Vaca Muerta, a shale basin in northern Patagonia, provides one example. Infrastructure has been a monumental problem in the region, with previous governments unable to commit to investment as a result of a volatile economy. It’s reported that new technology will cut production costs to US$36 per barrel of oil (on the market a barrel would typically sell in the region of US$80-US$90), triple oil production and double gas production.
So, what has Milei done regarding infrastructure in the region? Removed all federal transfers to the region in a bid to create a national fiscal surplus. This move has forced region’s governor to attempt to monetise Vaca Muerta through foreign investment.
Whilst drawing back state funding, Milei is also proposing a new investment law in the National Congress. The legislation provides both fiscal and tax incentives including allowing foreign investors to repatriate earnings, import any necessary equipment and removes both import and export taxes. It also promises zero government interference in the sector for the next 30 years.
Milei’s strategy is an economically liberal, hands-off approach, which seems destined to create opportunities within Argentina’s traditional sectors this year. This shock-therapy appears alien to the UK’s energy sector, let alone the rest of our economy.
The squandering of the UK’s most valuable natural assets in the North Sea offers a stark contrast to Vaca Muerta. About 60% of the UK’s oil and gas fields are destined to close by the end of the decade, and this is not due to a lack of supply or demand.
A report published by the Oil and Gas Authority, stated that an estimated 10-20bn barrels of oil lie in the North Sea. This ought to be good news as the UK continues to be largely reliant on oil and gas. Currently, they make up about 75% of our total energy mix.
Despite this, oil and gas operators face a staggering headline tax rate of 75%. This tax is ring-fenced and only applies to profits specifically from oil and gas extraction. It does not consider costs from other operations, meaning, in some extreme cases, a tax rate in excess of 100%. Compare this with the current corporate tax rate of 25% and it’s not difficult to see why energy companies are decommissioning.
Looking to the future, it seems unlikely that the UK will change its path. Both major parties are committed to Net Zero by 2050, and Labour are keen to increase the windfall tax to 78%. This is despite all reasonable estimates of the decarbonisation trajectory including the use of oil and gas at least into the 2040s – meaning Britain will be forced to rely on dirtier imports, often from questionable regimes.
An alternative to high windfall taxes is to compel companies to reinvest ‘excesses’ into alternative energy projects. This would essentially force private entities to pummel money into Net Zero investments in the hope that there may be societal benefits. However, this is hardly the way to attract investment to an industry that desperately needs it.
British governments have been highly ambitious in their attempts to reduce carbon emissions. However, it is important to recognise that the price of achieving Net Zero is almost unknown. There have been varying forecasts as to what it may cost the UK, usually between £1-3trn. Net Zero is a credible aim to reduce the impact of climate change, but it is unlikely to be achieved merely through government spending, arbitrarily high taxation on one sector, or excessive regulation.
Whilst it is difficult to see where this ‘radical’ reform will arrive from here in the UK, Argentina, through Javier Milei, is at least offering a case study in liberalisation that may be looked at in years to come.
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