Venezuela: The High Cost Of Low Gas Prices

Consumers there only have to pay 12 cents a gallon. The government subsidizes the rest. See Low gas prices plague Venezuela: Subsidy keeps prices low at the pump; too much of a good thing? at Market Watch. Excerpts:

"Successive governments have unsuccessfully grappled with how to raise prices, sometimes to disastrous effect. It was an unexpected gasoline price increase in 1989 that set off a week of deadly rioting.

The problem is not unique to Venezuela. Last December, Bolivia’s populist leader Evo Morales had to reverse a decree raising gasoline prices after his own leftist base went on a rampage. That same month, Iran posted troops at gasoline stations when President Mahmoud Ahmadinejad slashed the gasoline subsidy, quadrupling prices.

In Venezuela, local media seized on Chavez’s address, which hit a nerve among a population still smarting from last year’s difficult bout of water and power rationing. Additionally, Venezuelans already endure one of the highest inflation rates in the world, with food prices regularly climbing 30% a year, despite having some of the lowest energy costs.

Government officials quickly moved to quash the idea of price hikes, blaming the opposition for spreading misinformation.

“Where did the opposition get [the idea] that we’re going to ration gasoline or raise the price?” Oil Minister Rafael Ramirez later said during an address to the National Assembly. The government is requesting a more “rational use” of energy resources, not rationing, said Mr. Ramirez.

Nearly everyone agrees the artificially low price for gasoline fuels rampant consumption. “We drive around a lot and practically throw [gasoline] away,” Maria Eugenia Mored says as a gas station attendant tops off her Jeep Cherokee with 11 gallons for about 50 cents. “The streets are always packed.”

Such waste leads to reduced oil export revenues, hampering the national oil company’s ability to make badly-needed investments in its faltering production and refining capacity. Sweeping nationalizations have greatly curtailed outside investment into the oil sector, while massive cash transfers to the central government and rising capital costs also erode PDVSA’s, the national oil company, bottom line, say analysts."

"According to the Energy Information Agency, Venezuela’s refined product exports have fallen to almost 100,000 barrels a day from 379,000 barrels in 1997. Between 2009 and 2010, Venezuela was forced to buy millions of barrels of gasoline and blending components on the international market, an extraordinary situation that some liken to Saudi Arabia buying sand.

Because of the subsidy, PDVSA was paying as much as $60 a barrel for gasoline that was sold at home for the equivalent of $12 a barrel, says Gustavo Coronel, a former PDVSA board member and critic of Chávez’s oil policies.

“They cannot afford to go on like this any longer,” says Coronel,

Different analyst reports calculate that the subsidy’s true cost to the nation is between $7 and $10 billion, amounting to almost 5% of GDP. Barclay’s analyst Alejandro Grisanti said the subsidy is expected to climb to $10.5 billion this year as oil prices rise."