Venezuelans Brace for Pain of Higher Gas Prices

EspañolThe Venezuelan central government is preparing to violate one of its greatest taboos. That’s right, the oil-rich nation is set to increase the price of gasoline and reduce fuel subsidies that so many take for granted.

This will, however, not be an easy feat. The last time someone tried to put an end, even partially, to the heavily subsidized domestic gasoline market was in 1989. It resulted in a week full of street riots, 300 dead, and a president on the road to impeachment.

Now, 25 years later, President Nicolás Maduro has announced that gasoline prices will rise. Although when that will come to be is unclear, the debate, which he initiated last week, is only over how much.

At present, gasoline stands at a remarkably low 0.097 Bs. per liter, or approximately US$0.0012, the lowest price in the entire world. As the late President Hugo Chávez once said, water is indeed more expensive than gasoline in Venezuela.

These prices are only possible due to the hefty subsidy on fuel since 1976, at the expense of Venezuelan taxpayers. Rafael Ramírez, president of Petróleos de Venezuela (PDVSA) and minister of energy and petroleum, has said that the country currently bleeds $12 billion per year in order to sustain those subsidies. The International Energy Agency (IEA), however, estimates that figure at over $15 billion, subsidizing nearly 75 percent of the fuel production cost.

The Economic Commission for Latin America (ECLA) has reported that Venezuela now spends almost 5.1 percent of the nation’s GDP to maintain its gasoline prices. The situation is so absurd that it’s common to hear Venezuelan economists saying that the prices do not even cover the transportation costs associated with getting the gasoline to the stations.

One of the 1,724 working gas stations in Venezuela.
One of the 1,724 working gas stations in Venezuela. (Soberanía)

Economic Wisdom or Fast Cash?

But to what degree is the self-described Bolivarian Revolution willing to reduce the gasoline subsidy? Not much. Official calculations made by Ramírez place the new gasoline price between the 2.3 and 3.8 Bs. per liter — still a long way from the international price.

In fact, the decision to increase the gasoline price does not stem from a sudden economic enlightenment, rather from a desperate need for greater revenues. Maduro’s regime is suffering from a staggering lack of cash flow to make payments.

Amid this pressure, PDVSA has become a jack of all trades for Maduro. The oil giant has expanded into a trade company that imports food, medicine, and supplies that Venezuela no longer produces locally.

Members of the Chavista regime still believe that gasoline subsidies are the way to go, but the level of generosity is their concern. On several occasions, Ramírez has voiced this view with sentences such as “we have the record of being the country with the lowest prices on gasoline in the entire world; that is nothing to be proud of” and the unforgettable “PDVSA pays the people so they can refuel.”

His final line conveys the heart of the matter: the current price of fuel is so low, it doesn’t even pay for the cost of production.

Economist Jose Guerra, a former director of the Central University of Venezuela’s School of Economics, has noted via his Twitter account that if the government were to increase gasoline prices to 2.5 Bs. per liter, Maduro would receive almost 42 billion Bs. ($560 million) this fiscal year.

The regime would, without doubt, use that money to address the nation’s debt, which has snowballed in recent years. However, Guerra warns that such a gasoline price would push even official inflation to over 100 percent.

The heightened inflation would likely flow from two sources. The first would simply be the presence of gasoline in normal consumption patterns and embedded in products that require transportation costs. The second, and perhaps even more visible, would be the price of public transportation. Any incremental change to gasoline prices has meant, historically in Venezuela, a proportional change to the price of public transportation fees.

Public transportation carries extreme political sensitivity in the South American nation. In 1989, during the social mayhem of the Caracazo, the main parties behind the street riots were the public-transportation unions. The unions were mad at higher bus prices, which rose by presidential decree.

In this context, economist Angel García Banchs of Econometrica — normally an advocate for subsidy elimination — has written a public letter to express his concern about higher prices. Banchs explains that even though the rise is necessary, he cannot support subsidy removal in this manner.

He asks why Cuba still receives $12 billion in aid, over the dire needs of Venezuelans, and he believes the problems of corruption and interventionist meddling will remain: “to properly eradicate the fuel subsidy, we need to trust our politicians. Under the present circumstances, is it insane to believe that the new revenues will end up in some politician’s pocket?”

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