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     May 8, 2012

Who's afraid of Kirchner's oil nationalization?
By Cyrus Bina

Argentina's President Cristina Fernandez de Kirchner at a press conference on April 16 announced the seizure of a 51% control in oil company YPF and reasserted Argentina's control over its oil deposits.

The key phrase in this spectacular act was "recovery of sovereignty and control". YPF was Argentina's longtime national oil company, whose assets, including oil deposits, were owned by the Argentinian public until 1993. In 1999, YPF was taken over by Repsol, Spain's once national oil company. The YPF oil reserves amounted to two-thirds of Repsol's ownership of oil reserves before re-nationalization.

On April 26, Argentina's Senate voted 63 to 3 confirming the takeover. The expropriation bill was taken up by the lower house

of Argentina's Congress and passed by 207 to 32 on May 3. This bill is the latest in the carefully considered series of socioeconomic reversals against the 1990s' happy-go-lucky privatizations, known as neoliberalism, in Latin America and elsewhere in the world.

The brunt of the Thatcherite period of transvestite politics and war, dubbed as the Iron Lady Era, and the recklessness of the generals in charge in the 1980s and assorted civilian governments, hostage to neoliberal economic policies throughout the 1990s, made Argentina a basket-case between cannibalistic policies on the one hand, and the plight of capital flight on the other.

Argentina's economic default of the early 2000s was indeed a mixed blessing: it painfully revealed the tip of the neoliberal economic orthodoxy - long before the crisis of neoliberalism (and this malicious economic philosophy) tended to suffocate the world - and, at the same time, created wisdom for emerging from this mess by 2003 with the election of Nestor Kirchner.

By the mid-2000s, Argentina had fulfilled a negotiated settlement with private credit holders (ie, the transnational banks) and paid its US$8.9 billion obligation, in full, to the International Monetary Fund (IMF). Today, Argentina has no obligation to dance with the wolves of trickle-down "structural adjustments", required by the Fund.

This takeover amounted to the expropriation of all YPF oil reserves, which amounted to two-thirds of Repsol's oil reserves before re-nationalization. The fact that Repsol earns only one-third of its profits from YPF's oil reserves illustrates that the company was probably "sitting on the concession" - analogous to old colonial practices by the International Petroleum Cartel, known as the "Seven Sisters", of keeping certain oil concessions inactive and away from production.

To view another sign for sitting-on-the-concession, one needs to track the repatriation of profits through augmentation of dividends to shareholders, while maintaining the diminishing production of more than 20% between 2000 and 2010, despite the surging domestic demand in the same period.

This new move allows the country to increase its petroleum production in response to heightened domestic demand and to save on reserves of foreign currency that were needlessly spent on the imports of energy.

I recently returned from a week-long trip to Argentina, along with a team of eminent economists from around the world. We delivered lectures, exchanged ideas, and critically considered some of the issues associated with the current economic dilemmas facing the world (and Argentina).

I dissected the oil and energy sector along its evolutionary transformation: from cartelization to de-cartelization and subsequent competitive globalization. Included were the assessment of the nationalization of oil and the role of national oil companies in the era of competitive globalization.

During this visit, contrary to blowback of the austerity policies in the European Union and the United States, I found Argentina's economy vibrant, and despite the beleaguering worldwide economic crisis, and contrary to standard neoliberal recommendations by the International Monetary Fund, the country's anti-austerity policies had paid off.

Argentina's economy is now among the fastest growing economies in Latin America - with a more than 9% growth rate in 2010.

The upshot of my argument was that today's world economy cannot be chopped off or stretched out according to Procrustean fiat of "perfect competition" embedded in much of the mainstream economic analysis.

Globalization of oil is demonstrably rooted in the process of de facto nationalization of oil deposits in the aftermath of the collapse of the International Petroleum Cartel (1928-1972) in the early 1970s.

Capitalist competition (and incentive for capital investment on the competitive leases) and nationalization of oil deposits are theoretically and empirically compatible. Nationalizing oil deposits (that is, identifying differential oil rent from competitive profit) may not hinder private capital from earning competitive profit from investment on the exploration and development of oil.

To be sure, competitive return on public ownership of the oil-in-place is regulated by the magnitude of differential oil rents (commensurate with differential productivities of the various oilfields), whereas competitive return on capital is formed through investments by capitalists who hold the oil leases.

The legal ownership of the oil-in-place has scarcely been a serious proposition even during the heyday of the colonial oil concessions held by the Seven Sisters - except in the case of the "rule of capture" in the US oil region. The rule of capture refers to the right of land ownership together with the ownership of the sub-surface deposits.

Contrary to the illusion of "perfect and/or imperfect competition" in mainstream theory, genuine competition is neither perfect nor imperfect; it is rather a struggle of capital against contending capital, which in actual markets renders differential oil rents price-determined - not price-determining.

So, in reality, we have oil rents along with competitive pricing - an anomaly in textbook economics. That's why I contend that the 1993 wholesale privatization of publicly owned oil deposits in Argentina was ill-advised, if not downright stupid.

It recklessly surrendered what belonged to Argentina's citizenry to a private outfit, which later predictably transferred to distant absentee owners who proved to be indifferent to the national interest of the public in Argentina. And on top of the competitive profit on capital, Argentina's differential oil rent senselessly moved to the coffer of foreign capital.

Today, examples of an amicable coexistence between national oil companies and transnational capital abound. National oil companies in Abu Dhabi, China, Brazil, Emirates, India, Iran, Iraq, Italy, Kuwait, Malaysia, Nigeria, Norway, Oman, Paraguay, Russia, Saudi Arabia and Venezuela are all testimonial to a compelling theory that holds them together since the globalization of oil in the 1970s.

Even in the US, where the "rule of capture" prevails, there are public lands managed by the Bureau of Land Management of the US Department of the Interior. The oil deposits under these lands (and deposits in the Outer Continental Shelf) are leased rather routinely by the US government on behalf of real owners - the American public.

This sobering reality check would assure the amicability of coexistence between nationalization of oil and privatization through the application of competitive leases.

It is in this context that the government of Argentina should beware that Repsol's alleged claim of compensation for market value of Argentina's nationalized oil deposits is frivolous. Claims that contradict sovereign rights of the rightful owner, in this case, the inalienable rights of Argentina's citizens over their oil deposits, are a contradiction in terms, which negate the original cause of national sovereignty.

Therefore, any legitimate claim by Repsol must be limited to the pre-nationalization portion of fair value of oil facilities and structures that were allegedly owned by the company in YPF by means of neural arbitration.

However, to safeguard the interest of the public fully, Argentina's government needs to reexamine the Nationalization Act by allowing for complete control (rather than 51% control) overall petroleum resources that are in private hands. This, of course, should exclude the assets that belong to the company in facilities and structure.

Therefore, I propose that, by preparing an addendum to that effect, the government should without further ado revisit the bill and complete the task of genuine nationalization of oil in Argentina.

Against all this, a senior oil analyst at Oppenheimer & Company in New York was quick to say: "The oil industry in Argentina is just getting ready to take off, but this may be a way to kill it in its infancy."

I don't know whether I should be astonished by the paucity of economic knowledge or by the audacity of fear-mongering in this statement. But then, as the saying goes, for Chicken Little the sky is falling. This also goes for sheer hypocrisy on the part of Brazilians who tend to admonish Mrs Kirchner for re-nationalizing Argentina's oil, calling her "crazy queen", while holding fast to their own "crazy" nationalized oil company - Petrobras. What is good for the goose is good for the gander - isn't it?

In Europe, the Spanish government appears to have come to Repsol's defense by initiating a war of words against Argentina, while playing padre to a private outfit that at the end of the day may not have any choice but to settle for the market value of its pre-nationalized facilities alone.

The Spanish government, however, gives the impression that by harping on the "beggar thy neighbor" remedies through Repsol may obtain extra-judicial compensation.

For those familiar with nationalization of oil in Iran and expropriation of the Anglo-Iranian Oil Company (AIOC, now BP) in 1951, this case may be one of deja vu. Soon after the nationalization in Iran, the British government under Winston Churchill condemned the Iranian government. Churchill then entered into the fray by playing godparent to AIOC - a colonial outfit and, in the eyes of Iranians, a Trojan horse at the service of Britain's meddling in Iran's internal affair.

First, by sending HMS Gambia (along with two frigates) to the upper Persian Gulf close to the Abadan refinery, Britain engaged in a show of force against the newly formed Iranian government by a Swiss-educated lawyer, named Mossadegh.

Her Majesty's government then filed a frivolous claim at the International Court of Justice in The Hague - shamelessly insinuating that this nationalization was a violation of international treaty - and went on to perpetrate further sabotage and intrusion in the domestic affairs of Iran.

And if that was not enough, Churchill unremittingly hard-pressed the Americans to break international law and do the unthinkable. Soon after, the 1953 CIA Coup d'etat was placed on the drawing board.

In the case of treatment of Argentina's nationalization, tragedy turns to farce. Catherine Ashton, the European Union's high representative for foreign affairs, reportedly warns that "the measure [that is, Argentine's oil nationalization] creates legal insecurity for all European Union and foreign firms in the country."

Ashton should be reminded that her broad-brush phrases, "all European Union" and "foreign firms in the country" have less to do with the specifics of Mrs Kirchner's re-nationalization of oil in Argentina and more to do with the abrogation of Argentina's sovereignty.

Ashton also should be encouraged to leaf through the not-so-distant history of her own country, if I may say, with a trace of graceful blushing. A suitable start, may I suggest, is to thumb through incriminating documents buried in AIOC's illustrious history and to hold off uttering any panoramic public statements against Argentina.

Finally, while the ideologically charged corporate media, with very few exceptions, are habitually echoing the backing of private absentee-owners of Repsol's claim on Argentina's oil and gas deposits, we need to educate ourselves on the reality of the de-cartelization and competitive globalization of oil, without prejudice.

This needs a critical understanding of the fact that neither the fairy-tale price theory espoused by many mainstream economists nor blindsided, self-destructive, cannibalistic, crisis-ridden, and ultimately stupid neoliberal policies will work.

Yet, as we can see, the debate over Argentina's oil nationalization is already laden with malign ideology rather than objective economic thinking. As William Shakespeare may have said on this occasion: "Let each eye negotiate for itself."

Cyrus Bina is Distinguished Professor of Economics at the University of Minnesota (Morris Campus), USA. He has written several books and numerous articles on all aspects of oil and energy industry worldwide. His most recent book is Oil: A Time Machine - Journey Beyond Fanciful Economics and Frightful Politics, 2nd Edition, (2011). Bina is also a coeditor of forthcoming Alternative Theories of Competition: Challenges to the Orthodoxy, Routledge 2012.

(Copyright 2012 by Cyrus Bina) 

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