Argentine energy crunch looms over next government

By Cesar Illiano - Analysis

BUENOS AIRES (Reuters) - Argentina's next government will have to consider raising natural gas and electricity prices soon after it takes office in December as a way to avoid a repeat of the energy crisis of recent months.

President Nestor Kirchner has avoided mass blackouts in the run-up to an October 28 presidential election by imposing energy restrictions on industry in Latin America's No. 3 economy, where supplies are tight due to rapid economic growth and years of underinvestment to expand production.

Polls suggest Kirchner will be succeeded by his wife, Sen. Cristina Fernandez de Kirchner, and she has already ruled out significant utility rate increases, saying any changes to current prices will be gradual.

The new government will take office on December 10, during a month in which energy demand jumps as Argentines crank up air conditioners during the Southern Hemisphere summer. Experts expect a repeat of the problems posed by this year's winter -- the harshest in more than four decades.

"In order to encourage private investment in the sector, a significant tariff increase for utilities, combined with the elimination of a cap on energy prices, is vital," said Ana Ares, the director of ratings agency Fitch in the South American country.

SCANT INVESTMENT

Scant investment in increasing energy production during a four-year recession that started in 1999 left the country ill-equipped to respond to the surging demand that has accompanied the economy's rapid expansion since 2003.

Economic analysts say price freezes have aggravated the problem by deterring the much-needed investment.

They are also expensive. The government pays several billions of dollars in subsidies to companies to compensate for the extra cost of using diesel or heating oil to replace natural gas to meet their power needs.

But the government's 2008 budget bill already envisages the continuation of the subsidies, suggesting radical changes to current energy prices are unlikely.

Kirchner's popular center-left government has shrugged off accusations of feet-dragging in energy projects and has blamed the energy shortages on "growth tensions." Argentina's economy is on track to complete its fifth year of growth at a rate of more than 8 percent.

Kirchner's former economy minister, Roberto Lavagna, who is now competing against the first lady in the presidential race, accuses the president of reacting too slowly.

"A good response would have been an energy-rationing initiative, like they did 10 or 15 years ago in California, like five years ago in Brazil and like they do in China," he said during a campaign rally.

EXCESSIVE DEMAND

The energy crunch is seen as one of the biggest threats to Argentina's continued economic expansion, and the impact of bigger fuel imports and limited factory working hours during the winter has left its mark on key economic data.