Two Bystanders Die in Protests Against Gas Price Rise in Southern Chile

Protests in the Far South  Over Gas Price Hike 

Two women died yesterday and a child was wounded in the midst of protests against the Chilean government for the unexpected rise in natural gas prices in the Magallanes region in southern Chile. Magallanes, one of the most remote Chilean regions and one exposed to extreme temperatures, produces modest volumes of natural gas and has benefited from subsidised prices for the product for many years. The state-owned Empresa Nacional de Petroleo (ENAP) had announced that, starting on 1 February, it was hiking the price of natural gas supplied to the local distributor Gasco Magallanes by 16.8%. It did, however, indicate that around 92% of Gasco Magallanes's customers would benefit from the continuation of a subsidy of US$1.3 per million Btu for customers with a maximum monthly consumption of 1,000 cm of gas. The measure has, nonetheless, generated much controversy, especially as President Sebastián Piñera had promised during his 2009 presidential campaign that residents in the Magallanes region would continue to enjoy preferential prices.

Vladimiro Mimica, the town major of the provincial capital of Magallanes, Punta Arenas, has been leading the protests and has launched an indefinite strike in the region. Mimica has also been leading negotiations with the government, which so far have been unsuccessful. Government spokeswoman Ena Von Baer said that Piñera's administration is "open to making the measure for the rise in gas more flexible". She specified though, that being more flexible would not mean cancelling the hike altogether.

Meanwhile, protests have continued with locals blocking main access roads to Punta Arenas, Puerto Natales, and the tourist nature park of Torres del Paine. The Punta Arenas airport is open but cannot be accessed by road, Chilean airline, LAN has had to divert some flights to the region, and the main shipping ports in the region have closed. Episodes of looting have also been reported and protesters have built barricades in downtown Punta Arenas. In the meantime, local shopkeepers have closed down their businesses temporarily for fear of further violent protests. Given the scale of the demonstrations, the sub-secretary of the interior, Rodrigo Ubilla plans to visit the region in the following days.

Chilean Congress Approves New Fuel Price Stabilisation Mechanism

In other news, the Chilean Congress yesterday approved legislation submitted by the Piñera government proposing the replacement of the Oil Stabilisation Fund (FEPP) with a new price stabilisation system known as Sipco that aims instead to adjust the tax component in fuel prices in order to protect consumers from sharp fluctuations in international prices. The final vote in the Chamber of Deputies followed the return of the bill following amendments made by the unified commissions of finance, mining, and energy in the upper chamber. Under the new mechanism, if fuel prices reach a level of 12.5% above or 12.5% below a reference price there will be an automatic adjustment in the specific fuels tax. This is a wider band than the +/-5% band established under the previous system, but the new legislation does not differentiate between domestic and international prices or take into account the impact of exchange rate fluctuations on domestic prices. The shortcomings of the Oil Stabilisation Fund, which expired last June, became apparent during 2008 when record high international oil prices forced the previous government to make several large capital injections into the fund in order to cover the cost of diesel and gasoline (petrol) subsidies. Indeed, the finance minister, Felipe Larrain has previously said that the fuel subsidy programme cost the government US$2.34 billion between 2000 and 2009. The new system should be less expensive, as well as allowing the state oil company ENAP to continue to adjust domestic fuel prices in line with market prices, although the government will have to forfeit potential revenues from fuel duties during periods of high volatility in international prices. The new system will take effect after the president signs it into law and the government has the second phase of the new system in place involving the adoption of price hedging.

The implementation of a new fuel price stabilisation system has been a government policy objective from the start of President Piñera's term and its approval is not directly related to the gas price protests. Nonetheless, this issue is a reminder both of the vulnerability of the economy to price fluctuations on the international market due to Chile's status as a net hydrocarbons importer, and sensitivities surrounding the issue of domestic fuel price hikes. Indeed, the Piñera government will be conscious that the previous government headed by Michelle Bachelet, was forced into a humiliating climbdown over fuel price hikes after a three-day strike by truck drivers, which disrupted fuel and food supplies in the country and also threatened to affect exports of fruit, salmon, timber, and manufactured goods (see Chile; 9 June 2008: Chilean Government Concedes Defeat to Truckers and Agrees to Diesel Tax Cut and Chile: 6 June 2008: Chilean Transport Workers' Strike Continues as Authorities Struggle to Lower Fuel Prices).The current government is now facing its own fuel price crisis but appears unwilling to back down while the protests are still in full flow, instead continuing efforts to reach an agreement that makes the price hike more palatable.

Outlook and Implications

These are the most serious protests that President Piñera has had to face since being sworn in in March last year. The credibility of the president is at risk given that he had promised Magallanes's residents that they had "nothing to worry about" when residents asked him about the continuation of gas subsidies during the presidential campaign. Now Magallanes is completely paralysed and locals are echoing widespread worries that Piñera, a business tycoon, is  seeking to privatise ENAP and govern in favour of companies instead of locals. The remote region, highly dependent on gas given the cold temperatures it is exposed to throughout the year and the widespread use of gas for transportation as well as heating, has threatened to continue staging protests until the 16.8 % hike in natural gas prices is dropped. This could further harm the popularity of the president, who has experienced a steady drop in popular support in recent months (see Chile: 03 December 2010: Popular Support for Chilean President Drops). If the government does back down, however, it would set a negative precedent and perhaps encourage protests against future price hikes for other fuels. It would also send a negative signal to foreign investors who see the ending of price distortions in the gas market and plans to reduce political involvement in decisions by the state oil company through the removal of the mining and energy ministers from their boards of directors, as proof of the conservative government's pro-market credentials. It could also undermine the government's efforts to attract greater investment in natural gas exploration.