Milei: Libertarian Reforms, Increased Poverty, and Argentina’s New Economic Tool, Nequin Basin Oil & Gas

    After a year in power, we can now ask if Argentina President Javier Milei’s reforms are working. Well, I would say that depends on who one asks. Economics metrics show that the economy has indeed improved. The inflation rate has dropped by half, and the rental housing crunch has gotten better as there is more available housing at lower prices. Economic growth has returned and there is now a budget surplus. However, as the Washington Examiner article notes that is not the whole picture, as is often the case with economic reform. The poverty rate has risen. Argentina is one of the only countries that has struggled with its economy in the past decades as most other countries have improved. Clearly, there was a need for economic reform. Argentina’s residents are 13% poorer than they were in 1980, according to HumanProgress’s Marian Tupy.

     Milei has eliminated government agencies, cut wages, and made the government smaller. He has drastically cut government spending. His efforts are a model for Trump and DOGE.  However, unlike Trump’s plans, or rather threats, he has slashed tariffs. He has not adopted the U.S. dollar, which was widely expected but has made all currencies legal tender in the country. Milei calls himself an anarcho-capitalist.

“As the Economist put it: "Argentina’s president is often wrongly lumped in with populist leaders such as Donald Trump, the hard right in France and Germany or Viktor Orban in Hungary. In fact he comes from a different tradition: a true belief in open markets and individual liberty."

“He is a down-the-line libertarian who loves free trade, welcomes immigration, ignores culture wars, and has no problem with transgender people ("provided they don’t send me the bill").”

     According to an article in The Guardian:

“…the national statistics agency announced that Argentina had exited a severe recession, with GDP growing 3.9% from July to September compared with the previous quarter.”

     The austerity measures, though perhaps needed, have been a disaster for the poorest in the country. Gasoline subsidies have been cut. The price of food has risen. Rents have risen for low-income people. The halting of public works has resulted in job cuts. Milei did warn that things will get worse before they got better. Will Trump and Musk pipe a similar tune in the day ahead?

     Among the poor, many have lost their jobs. Some parts of the country are poorly developed with little or no access to potable water and bathroom facilities. More people are relying on soup kitchens for food. Milei cut public work projects and government pensions.

     Milei is now claiming that the period of pain is over. According to the BBC:

“The poverty figure for the first six months of this year was 52.9%, up from 41.7% in the second half of 2023, said the country's Indec statistics agency.”

     Milei’s coalition does not have a majority in Congress so there are checks and balances against some of his reforming power. Trade unions have protested his policies.

 According to Business Insider, Milei recently told Forbes Argentina of further reforms:

“We'll advance privatization, deepen labor reforms, and eliminate 90% of taxes — not revenue, but the number of taxes — moving to a simplified system with no more than six taxes at most."

“It is not only a question of deregulating and removing these obstacles, but it also implies a new reform of the state to make it even smaller," he said.

“Milei added that his administration has so far only implemented a quarter of the reforms it wants to pursue.”

     While Musk and Ramaswami are obviously impressed and inspired by Milei’s reforms, those who are losing out, namely the poor, will have to wait for some “trickle-down” effects to benefit.

     While the economic indicators have been good, there has been a recession and not everyone is pleased with the reform results so far.

“However, Facundo Nejamkis, director of Opina Argentina, a political consultancy firm, told Reuters this month that Milei's cuts had ignited a "major" recession, and according to Argentina's statistics agency, the country's poverty rate rose to 52.9% in the first half of 2024, the highest rate in 30 years.”

     Milei now claims the recession is over and that it was just the necessary initial pain of the reforms. Time will tell. Meanwhile, more people are still relying on food banks to eat.

Argentina’s Economic Weapon of the Future: Vaca Muerta Shale

     NOVI Labs’ Ted Cross notes that Argentina’s Vaca Muerta Shale wells are probably the best shale wells in the world with oil production 30% higher than in the Permian Basin of West Texas and gas production that much higher than in the Marcellus, all in the same Nequin Basin, which also has an aerial extent bigger than the Permian. However, there are significant political risks, which should decrease as time goes on. Argentina is not likely to nationalize oil and gas companies, at least not under Milei. Offtake is a factor, especially for natural gas, but pipelines and LNG export capabilities are being developed. Another problematic issue that can be overcome over time is the high costs of development. Those costs should come down as infrastructure, equipment, and labor become more capable and efficient. It is a true opportunity to develop an economic engine that benefits everyone in the country. As I noted in a 2023 post about the Vaca Muerta, the goal is to first supply all of Argentina’s oil & gas needs which have faltered in the past as fields in other basins have depleted. Then, the country can work on exporting LNG and oil, make deals to sell via pipelines to adjacent countries, and use the hydrocarbons for local industries.

     Time will tell if Milei’s reforms will be successful. Clearly, the past policies of leftist governments that relied on government subsidization of the poor have not worked for the general economy. The country clearly needs investment. Oil and gas can be a very successful investment opportunity for the country if costs can come down as more rigs drill and more pipelines transport those hydrocarbons.

     As the recent EIA graph below shows Argentina’s oil and gas production are both now up to and near previous peak levels after the drop-off due to depletion in the country’s other oil & gas basins. The Vaca Muerta Shale and associated tight rocks are now making up to half or more of the country’s hydrocarbon production and that will rise more and more as time goes on.

     According to the EIA:

“We estimate that the Vaca Muerta shale formation, located mainly in Argentina’s Neuquén province, has 308 trillion cubic feet of technically recoverable shale gas resources and 16 billion barrels of technically recoverable shale oil and condensate resources. Argentina ranks among the world’s top five holders of shale crude oil and natural gas resources.”

     Both oil and natural gas exports have grown:

“Argentina’s crude oil exports increased by an average of 33% per year from 30,000 b/d in 2017 to 128,000 b/d in 2023. Shale crude oil accounted for about 70% of crude oil exported in 2023. Argentina's primary destinations for crude oil exports in 2023 were the United States, Brazil, and Chile. The recent completion of the Vaca Muerta Norte Oil Pipeline helped facilitate exports to Chile.”

     Argentina is still importing some LNG for winter heating. This can be eliminated by the development of gas storage capacity. They imported about 200MMCF/day in 2024 which was a big drop from 2023. Reversing pipelines that once imported gas from Bolivia to exporting gas to Brazil from the Vaca Muerta is underway. Exports to Chile have also increased. As noted below, economic reforms have been enacted to improve international investment in the resources.

“Argentina's government has implemented new policies to boost energy production and exports, including the Plan Gas.Ar. In addition, the Plan Gas IV Program expanded export authorizations and four-year export contracts for natural gas—the country’s first multiyear contracts in two decades. Last July, Argentina’s Congress also passed a Promotional Regime for Large Investment (RIGI), aiming to provide certainty and legal stability to investors by offering tax, customs, and currency exchange incentives, which could support new spending on infrastructure.”

“Several companies are planning floating LNG (FLNG) infrastructure in the coming years. Golar LNG has a 20-year agreement with Pan American Energy (PAE) to deploy an FLNG vessel in Argentina by 2027, targeting a production capacity of 2.45 million metric tons per year (MMmt/y). Tecpetrol SA is designing a modular onshore plant with an initial capacity of 4 MMmt/y. YPF SA, Argentina’s state-controlled energy company, plans to bring an existing FLNG facility online by 2027, aiming for 1 MMmt/y to 2 MMmt/y of additional export capacity. It is also seeking new investors for an LNG export project in Rio Negro, despite uncertainties regarding Petronas's involvement and significant infrastructure costs.”

     The bottom line is that oil & gas wealth will eventually increase the wealth of Argentinians.

 

References:

 

Foul-mouthed Milei shows libertarians the way. Opinion by Dan Hannan, Washington Examiner. December 13, 2024. Foul-mouthed Milei shows libertarians the way

‘Everything is so bad’: Argentina’s poor hit hard by Milei’s ‘chainsaw’ measures. Harriet Barber, Tom Phillips and Facundo Iglesia in Buenos Aires. The Guardian. December 18, 2024. ‘Everything is so bad’: Argentina’s poor hit hard by Milei’s ‘chainsaw’ measures

DOGE inspiration Javier Milei says he'll reform Argentina's tax system to have no more than 6 taxes. Thibault Spirlet. Business Insider. December 23, 2024. DOGE inspiration Javier Milei says he'll reform Argentina's tax system to have no more than 6 taxes

Argentina records sharp rise in poverty. Robert Plummer. BBC. September 27, 2024. Argentina records sharp rise in poverty

Argentina’s crude oil and natural gas production near record highs. Energy Information Administration. Today in Energy. December 5, 2024. Argentina’s crude oil and natural gas production near record highs - U.S. Energy Information Administration (EIA)