The Perverse Gasoline Subsidy in Petrostates

May 27, 2011

A reader was kind enough to send me this table he found on the size of the largest  gasoline  subsidies in the world by monetary value and its respective correspondence as a percentage of GDP.  As you can see oil is indeed the Devil Excrement in oil producing countries, as this subsidy always ends up being one to the rich, who are the ones that own cars and benefit the most from it. And who pays? The poor of course!

(Source IEA World Energy Outlook)

The subsidy in Venezuela is actually larger than the IEA estimates shown above. To begin with, these number come from official statistics on gasoline consumption by PDVSA and the Government which are really low compared to what gasoline consumption truly is, but that is a small correction on the scale of things. (Economist Angel Garcia Banchs estimates it to be US$ 19.9 billion or 8.5% of Venezuela’s GDP)

Of course, in Venezuela, much like what has happened in Iran, this subsidy has a compounding effect, as people use gasoline more and more, because it is so cheap and oil production is going down simultaneusly, so that you get hit twice, as more of the lower production has to be used internally.

What is amazing is that while nothing is done to remedy this problem by eliminating or reducing this perverse subsidy, other subsidies which are likely to be fairer (and even guaranteed by the Constitution) are eliminated or reduced, as the price of the subway is increased and tuition is no longer free “retroactively” at the Bolivarian University.

It is indeed the Devil Excrement at work in all of these Petrostates…

21 Responses to “The Perverse Gasoline Subsidy in Petrostates”

  1. megaescualidus Says:

    Algeria, not “Alegria”. Is that a happy country?

  2. torres Says:

    What’s incredible is some people expecting money not spent in favor of the poor to benefit the poor more than the rich. In the case of gasoline subsidies, the product’s target must have a car, then must travel! How poor can one be to benefit? Perhaps they think that the poor benefit from the rich travelling and spending whereever they go?!

  3. IvoSan Says:

    According to El Troudi, each trip in Caracas subway takes a 4,5 bsf subsidy. And every day there are 2 million trips, so that’s aproximately a $700 million/year subsidy. However subway subsidy is nowhere as regressive as gasoline subsidy

  4. Carlos Says:

    I certainly like the gasoline subsidy, I praise it. Why?
    Assume that, beginning today we pay some 4000 Bs/Liter or 15000/gallon. Where will the money go? To Fonden or some quickly named new government fund, or to fund some new chavista Mission something, not the treasury or central bank.
    Also, most of gasoline subsidy beneficiaries are MID CLASS citizens. I’d say 3/4 of them are opposition votes.
    The end of this subsidy would be a huge transfer of money from midclass and opposition pockets to government and chavistas pockets.Money that will be used to buy votes or promote Chavez and chavistas governors.

  5. moctavio Says:

    must be… :-)

  6. moctavio Says:

    Sorry carlos, that is what got us into this hole, we have to get pissed, but nobody seems willing to.

  7. Kepler Says:

    Wao, Carlos! You don’t seem able to get it.

  8. Kepler Says:

    Wao, Carlos! You don’t seem able to get it. This subsidy is the worst thing there is. For you it seems everything is about your condition against those who are in power now, and the hell with the poor.
    Sorry, man, but the “middle class” also needs to learn a lot. Most of its previous confort level was not due to some higher intelligence or work but just because they happened to be closer to the oil teat and/or were the one-eyed in the land of the blind.

    Chávez is a cancer, but he is not the main problem in Venezuela. And part of the main problem is the attitude of large parts of the population, from the very top to the bottom, Chavistas and non-Chavistas.

  9. loroferoz Says:

    Carlos:

    I have heard many a Venezuelan say something like you just did. They, like you, don’t want to see past their noses. The gasoline subsidy, though cool for people like me, who used to drive a huge roaring 4×4, is a part of the Petrostate that costs a lot of money to keep dirt-cheap car trips and bus fare, and near-constant traffic jams that waste huge amounts of gasoline.

    This lack of interest for what lies more than three minutes in the future of Venezuelans is the main reason Venezuelans voted into office, let me see… CAP (2nd.), Caldera (2nd.), Chavez, Chavez (2nd., Constituyente), Chavez (3rd.) and might vote Chavez again. It is a recipe for entering a world of… er, intense pain, with no cheap gasoline either. In pessimistic opinion, Venezuelans are headed there, unavoidably. To decide, then, for how long, how intense, and if it includes civil and guerrilla war, famine or foreign military intervention.

    We don’t blame you for saying that if the Petrostate still stands, any measure taken will produce the scenario you picture at the loss of benefits. Still, wrong answer because the likely result of it is unpalatable; but a point might be awarded because you implied there’s a bigger problem that won’t be solved by point measures.

  10. Iguana Magnicida Says:

    The problem with Venezuela’s gas prices is that they have become an “right”. Just as Greek pensions or Portuguese retirement ages.

    To break the vicious cycle and swallow the bitter medicine, a lot of factors (many of them painful) need to align.

    Just to compare:

    In Mexico and Brazil, were NOC’s sell gasoline, they do so at near market prices. In both cases, althought historically different, we have Latin American companies selling energy to their citizens without losing money as shamefully as PDVSA does.

    In the case of Mexico there is a some discount and in the case of Brazil theres is a heavy up-mark (some 50%, so it is more expensive than gas in the U.S.).

    Regards to all,
    RM

  11. maria gonzalez Says:

    “Chávez is a cancer, but he is not the main problem in Venezuela. And part of the main problem is the attitude of large parts of the population, from the very top to the bottom, Chavistas and non-Chavistas.”

    Kepler agree with you statement 100%.

    Carlos…so you want that your children and grandchildren will pay the price of the cheap gas benefit that you enjoy now.

  12. Ira Says:

    Highly subsidized gas prices for Venezuelans is a non-issue.

    What leader wouldn’t do this…on the left OR the right… the economic damages be damned?

    I have a deep background in economic development publishing, and when push comes to shove, environmental concerns protecting green space, protecting species, etc., always loses out to the dollars involved.

    So why would anyone think that raising VZ petrol prices would garner the support of the people–regardless of how economically necessary it is? People don’t care, and it’s not just Chavistas that don’t care.

    Unseating Chavez will NEVER involve raising gas prices.

  13. torres Says:

    I interpret what Carlos wrote to not to mean that he wouldn’t end the subsidy, but that he wouldn’t end it while the money from the subsidy would go into chavez’s hands, taking it from middle class opposition, to boot. That is, he wouldn’t end it *now*, but after the opposition takes over, then it would go to proper distribution and not as he describes, “to buy votes or promote Chavez and chavistas governors”.

    Maybe I understood him wrong…

  14. loroferoz Says:

    Torres:

    It’s extremely improbable that Hugo Chavez will ever end the gasoline subsidy.

    Carlos has a point. The government will have more money but will misuse it and I will not be the first fool to give up freebies. An answer you can sympathize with, but wrong.

    A similar thing could be said in the not-so-far future by, say, a chavista or ni-ni, of a future opposition government and president. What’s worse, it could even be all too true, if the present state of affairs continues.

    But the worst of it is that such Petrostate liabilities and externalities, when summed over, mean that Venezuela about to enter a world of hurt, where there will not be giveaway gasoline or subway rides either.

  15. torres Says:

    loroferoz, oh, my position is to get rid of the gasoline subsidy, and all others for that matter. I just felt that Carlos’s seemingly tongue in cheek comment was being taken the wrong way. I mean, what Carlos is asking is what is worse, chavez with the middle-class’s money, or chavez without it. In that simplistic sense, sure, but that doesn’t rule out having to get rid of the subsidy.

    Heck, I think we need to get rid of the petro-state as soon as possible, yet there are those –even some against the gasoline subsidy– that would rather keep control of the oil money for “proper” spending. As you can see, there’s a spectrum.

  16. Carlos Says:

    I’ve read all and I let the dust settle.
    Ok..let’s see.. A probable right price for the fuel would be the standard 1 US$ per Lt, this is 4.3 BsF per Lt. A car burns about 50 liters a wee, for 200 bs/week in subsidy or 10.000 Bsf per year. Say..2 cars per family, 20.000 Bsf per family.
    I ask the crowd to walk the talk: just make a check to FONDEN for 20.000 BsF at year end (may be you would rather make it in March, so you will pay it in top of your ISLR). That’s it…As far as I see the first 1000 checks I will support the end of this subsidy and will join the crowd with my check returning the unfair subsidy.
    BTW: ALL SUBSIDIES ARE BAD. A subsidy is the plain transfer of money from all people pockets to selected individual pockets.
    There are many subsidies in Venezuela: CADIVI Dollars and SITME auctions are gross subsidies, probably the worst distributed: airline tickets, credit card travel expenses, tuition and living expenses for students that will never return to Venezuela, consumer goods imported at cheap foreign exchange rate and then priced at black market rate, money transfer for family abroad, etc etc.. There are also subsidies for banks like the structured notes, the low interest/high inflation policy, etc etc
    Cheap subway tickets, half a million people collecting some sort of salaries in Misiones, cheap electricity, etc etc are other wide spread subsidies.

    People enjoying gas subsidy are probable the only ones that pay for such subsidy in advance: a Corolla in Venezuela is priced near 50000 Cadivi dollars, 40000 Sitme dollars or 25000 greenbacks. This is more than twice the international price. A Grand Cherokee 4 x 4 carries a 100000 official CADIVI dollars sticker price, of which near 50% in Taxes.. This tax is more than 10 years of gas subsidy the owner have to pay in advance as taxes.
    Who is subsidizing who?


  17. The problem is that I have been hearing similar talk all my life. It is a vicious circle, in the IVth. Republic it was taxes, now it is gas, it is a chicken and egg problem. Until we start running the country RATIONALLY we are not going to get out of the rut and we ware becoming more like an African country, further and further away from development. Thus, I can not endorse keeping the subsidy, the same way I can not endorse SITME, CADIVI, cheap imports etc.

    In the end, there are people out there hurting and hurting badly because of this craziness. Economics is the optimal use of limited resources, Venezuela is the anti-economics country, the least optimal use of resources.

  18. loroferoz Says:

    Carlos: Hats off. No irony whatsoever.

    You have brought a second and more important point into discussion. There ain’t no such thing as a free lunch, a wacky science fiction author said in a wacky novel. True, as long as we live in this universe and thermodynamics are not void.

    Subsidies and other distortions are perverse, as miguel’s headline implies. They are paid for with usurious interest. At times twice or thrice, and often by the persons who thought they got something for free. Then the subsidies have to end. But their consequences endure, particularly when lenders (and the Devil) expect their due.

    Your example is sterling. The Petrostate, exchange controls and other distortions mean huge price tabs for almost everything that is not subsidized. The official rate is a fantasy when you buy in BsF (strong BS?). It’s real only when you have CADIVI dollars on hand and are buying yourself, outside of Venezuela.

    And then the subsidy bites back at its providers with a vengeance. In other countries, people buy new cars that are ever more fuel efficient and less poluting. Except in Venezuela where the poor are stuck with old cars and the rich buy insanely huge SUVS and pickups. Then, there are constant traffic jams at Caracas and other cities. All subsidized gasoline, most of it leaded.

    I kept a record of my gasoline consumption for personal use. But had not enough money left thanks to inflation and a salary that did not keep up, to pay for gasoline, the old car’s spares and repairs cost half a month salary at times. It’s a vicious circle.

    And I decided to escape before the stresses broke the circle, catastrophically.

  19. m_astera Says:

    I think of the old ladies I see who take a taxi to buy their weekly groceries, and the crew with the old pickup who collect the trash where I live. I think of the freelance taxi drivers with forty-year old rusted out Chevys, and the guys who make a living helping people move. I could come up with more examples, but these are not rich or even middle-class people and they would be out of work and out of luck if gasoline was $1 a litre.

    My basic question remains the same: Whose oil is it, anyway? The government’s or the people’s?

  20. Jim Miller Says:

    Correction: The IEA totals are for all fossil fuel subsidies, not just gasoline.

    In Venezuela, most of the subsidy may go to keeping gasoline prices low, but that isn’t necessarily true for other countries. In Iran in 2009, for example, the subsidy for natural gas and electricity production were, together, larger than the subsidy for oil.

    (Despite the mistake, thanks for bringing these numbers to my attention.)


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