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Buenos Aires Herald: Shell shock

Saturday 30 September 2006
The successful government pressure on Shell to suspend its new V-Power diesel pending government authorization of the product sets an alarming precedent for any market economy — would Alexander Graham Bell have felt obliged to seek government authorization before inventing the telephone or the Wright brothers to invent the aeroplane?

The government’s motivation for suppressing Shell’s new product is obviously its anxiety to tame fuel prices, suspecting this fuel innovation of being a backdoor price increase (V-power cost 15 more cents a litre on the basis of upgrading purity by 10 percent).

But if Shell insists on pricing itself out of the market by charging more, surely that is Shell’s problem — urging people to buy cheaper brands gratuitously insults the consumer’s intelligence (as President Néstor Kirchner has already done when calling for a boycott against the same company 18 months ago). Charging more for a product than competitors may be folly but why should it be a crime?

Yet Shell’s move should not be seen as either folly or a crime if understood as an attempt to circumvent the growing shortage of fuel — a shortage which has led to 1,400 service station layoffs and which threatens night buses with even more drastic consequences in the hinterland (thus ambulance services have been hit in Córdoba).

Paradoxically, the populist pricing of fuel (held to a third of world levels) as well as transport subsidies have only compounded the shortages. The upgraded fuel not only clashed with the government’s anti-inflationary strategy by raising the price but also with an ordinance progressively diluting diesel until 2008 in order to keep prices down. But if the government is so concerned about fuel prices, it could think of scaling back their huge tax component.

This lack of price freedom goes far towards explaining why Argentina has fallen from 54th to 69th place over the last year in the World Economic Forum’s league of competitive nations, which was published earlier this week. Argentina’s competitive shortcomings do not so much arise from the somewhat abstract sphere of institutional quality, as stated in the Forum’s report, as from the simple inability to price freely — low costs are scant benefit for businessmen if the government forces prices down even lower.

Instead of populist prices accelerating the depletion of a product in short supply, the government should start producing some serious energy conservation policies.

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