By ALEXEI BARRIONUEVO
The New York Times
During one of the coldest South American winters here in decades, neighboring Argentina cut at least 90 percent of the natural gas it sends to Chile 79 times along pipelines that connect the two countries.
Power plants and factories in this smoggy capital were forced to switch to diesel and fuel oil, which belch more air pollution and have nearly quadrupled the cost of producing electricity. Santiago reported its highest number of dangerous smog days in the past seven years.
Argentina’s actions have chilled relations between the two countries. But the impact of South America’s energy crisis is far broader. Across the region, concerns about energy are roiling national politics, generating tensions between neighbors and emerging as one of the biggest brakes to growth and integration.
Energy is the Achilles’ heel of the governments in Brazil, Argentina and Chile, which are struggling to maintain sufficient natural gas supplies after several years of strong economic growth.
“Bottlenecks in energy supply will be a critical policy concern in Latin America over the next two to five years,” said Christopher Garman, the Latin America director at Eurasia Group, a New York-based consulting firm.
Energy concerns are at the top of the agenda for the region’s incumbent leaders, most of whom have high popularity ratings, thanks mostly to buoyant economies riding a wave of higher commodity prices.
But the steady economic growth has only increased energy demand, while governments have failed for a decade to invest enough in natural gas exploration and new power plants to expand their energy supplies.
President Luiz Inácio Lula da Silva of Brazil is particularly preoccupied with the risk of power shortages that could occur as early as 2009, according to analysts. In an interview in September, he said the region’s gas woes were reason to support new hydroelectric power plants and projects to produce electricity from sugar cane. “I do not want to make Brazil dependent on gas,” he said.
The other alternative is to raise consumer prices or impose austerity measures, something politicians have been reluctant to do. History shows they can help sink a president.
When Brazil suffered an energy crunch in 2000, President Fernando Henrique Cardoso implored consumers to conserve, imposing penalties on those who did not. In the end, a major crisis was averted, but the government’s approval rating dropped by a third, and Mr. da Silva — not Mr. Cardoso’s chosen successor — was elected in 2002.
Néstor Kirchner, Argentina’s president, has steadfastly refused to raise his country’s gas and electricity prices, which are among the lowest in the world, ahead of the Oct. 28 election. Mr. Kirchner’s wife, Cristina Fernández de Kirchner, is the leading candidate to succeed him.
Instead, his government placed winter energy-use restrictions on industries and cut off its neighbor to the west, Chile.
Mr. Kirchner’s strategy has satisfied voters and kept Argentina’s economy humming, for now. But the low gas and power prices have scared away needed foreign investment in energy development and raised fears of runaway inflation.
Argentina could be digging itself a bigger hole to crawl out of. While the government refuses to impose on residential consumers to cut back, Argentina’s energy demands are rising faster than supply.
Power plants have little or no spare capacity and are suffering from a lack of maintenance, increasing the chances of brownouts or blackouts, said Sylvie D’Apote, an analyst with Cambridge Energy Research Associates.
Argentina’s energy troubles began with the crushing economic crisis of 2001, when its currency, the peso, was devalued almost overnight by some 300 percent. In a panic, the government moved energy rates from dollars to pesos.
Suddenly Argentine natural gas was the cheapest in Latin America, and residential electricity rates were among the lowest in the world.
For Mrs. Kirchner, if she is elected, changing course would be risky. Raising energy prices would only worsen inflation and raise the ire of Argentine voters, potentially spoiling the Kirchners’ plans to tag-team the presidency for the next 12 years.
Argentina’s economy, which is expected to grow this year by about 8 percent for a fifth straight year, is struggling with rising inflation pegged by private economists at nearly 20 percent, more than double official government claims.
Mr. Kirchner has denied there is even an energy crisis, noting that residential consumers have yet to feel a pinch.
Instead, it is Chile that is being squeezed. With few energy resources of its own, Chile had come to rely on Argentina for natural gas. The neighbors signed contracts in 1994, giving Chile a cheap source of fuel and a way to help clean Santiago’s notoriously smoggy air.
Argentine officials say that the Argentine Congress never approved the energy accords, making them nonbinding. The Chileans call that claim ludicrous.
The energy crunch is already contributing to inflation in Chile. Chile’s inflation is expected to be 6.4 percent this year, nearly a third of which is attributable to the cost of energy and food, said Pablo Goldberg, chief economist for Latin America at Merrill Lynch.
Political problems have limited Chile’s energy options. Bolivia, which has the largest gas reserves in the region, has forbidden Argentina from re-exporting Bolivian gas to Chile because of a decades-old dispute over maritime access rights.
Analysts have doubts in any case about just how much natural gas Bolivia, which nationalized its gas sector last year, can extract without foreign investment.
With few options, Chile’s government, led by President Michelle Bachelet, is moving on several fronts to diversify its energy supplies.
Two liquefied natural gas terminals should be completed by the middle of 2009. Chile is also opening up some land for oil and gas exploration, though it historically has found little.
Ms. Bachelet received a government-financed study last week exploring the prospects for building nuclear power plants, which is likely to be a controversial decision for the next government.
“We can’t just wait with our arms crossed and hope for a miracle to happen,” said Antonio Baciagalupo, the chief executive of GNL Quintero, the consortium building the liquefied natural gas plant near Santiago.