Argentina Should Know That Nationalizing Oil Doesn't Work

And although Western economies have experienced troubles recently, nothing has happened to suggest that Peron-era policies will provide a better approach.

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Michael Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research.

The Argentine government has triumphantly announced its intention to nationalize YPF, the former national oil company that was privatized and bought by Repsol, the Spanish oil company. With the latest discovery of huge tight oil reserves (shale oil) and with oil prices at record levels, the company is prospering, making the takeover look attractive.

It would be excessive to compare this to Einstein's saying that repetition of unsuccessful policies while expecting different results defines insanity, since it is a different group of people than those who pursued the similar policies in the past. Still, the failure of younger policymakers to learn from those mistakes is not much of an excuse.

[See a collection of political cartoons on energy policy.]

When Peronists did their damage to the Argentinian economy, following a path that combined socialism with nationalism, they at least had the excuse of listening to many illustrious economists and policy thinkers. The national oil company, YPF, was a part of a broader move towards greater government control over strategic industries and national resources.

This strategy has long since been discredited by actual developments, not least in the case of YPF. It became famously inefficient, hiring and spending in response to political pressure, and after privatization, although oil drilling in Argentina dropped by three fourths, production soared, making the new YPF a poster child for privatization.

[Read the U.S. News debate: Will Obama's Plan to Enforce Oil Market Regulations Lower Gas Prices?]

And although Western economies have experienced troubles recently, nothing has happened to suggest that Peronism will provide a better approach. Argentina's government has been eating its seed corn, taking control of pensions and the central bank to cover the losses its policies have engendered.

And if the lessons of Peronism are not sufficient, think on the show business adage, "Be nice to the people you meet on the way up, you meet the same people on the way down." Argentina's government is clearly hoping that the industry will remain flush and that rising prices will cover any errors they make. However, this same presumption failed many governments in the 1970s, and there is little doubt that, as high oil prices suppress demand and boost production, oil prices will be lower even as YPF finds itself struggling with politically-imposed losses.

[See a collection of political cartoons on gas prices.]

Argentina's economic policy reminds one of the children's tale of the Little Red Hen in reverse, where the private sector does the work and then the government seizes the gains. This is a great short-term strategy, but will always lose in the long run, and the world will once again bemoan the failure of Argentina to live up to its promise.

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