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Venezuelans revel in costly petrol subsidy

By Benedict Mander in Caracas

Published: June 30 2008 17:03 | Last updated: June 30 2008 17:03

Sipping a cool midday beer on the banks of the mighty Orinoco river, Antonio frowns with distaste as he reminisces about the days when he used to work hard for a living.

With international oil prices soaring and domestic petrol among the most heavily subsidised in the world, he ditched his job at a remote jungle gold mine in southern Venezuela to sell petrol illegally across the river in Colombia.

“Being a miner was tough,�? explains Antonio, as he takes another slug of beer, adding that most of his fellow workers reached the same conclusion. The gold mine is now abandoned.

“Why bother when you can earn more and work far less by buying petrol for next to nothing here and selling it for good money just on the other side of this river? Of course, it helps that the national guard turn a blind eye for a cut.�?

Such incentives to smuggle petrol mean the practice is rife in most border areas – locals even say that Farc, the Colombian Marxist guerilla group, is profiting handsomely from petrol contraband in the area.

Venezuelans pay just 3 to 4 cents for a litre of petrol. A tank can be filled for as little as $1.50.

“It is so cheap as to be practically free. As a result, consumption is disproportionately high – people use their cars just to go to the street corner,�? says Domingo Maza Zavala, an economist and former director at the central bank.

Together with a booming domestic economy thanks to high oil prices, this has caused Venezuela’s petrol consumption to double in the last five years.

Elsewhere in the world, particularly in south-east Asia, petrol subsidies are being trimmed because of increasing costs and the distortions that they bring as the price of oil rises.

But in Venezuela shorter-term imperatives mean that the subsidy is unlikely to be eliminated soon. On Saturday Hugo Chávez, the president, said he had “no immediate plans�? for a petrol price rise.

Economists say the petrol subsidy is costing the government at least $10bn to $12bn (€7.6bn, £6bn) a year in lost export revenues.

However, Mr Chávez is already struggling to contain the highest inflation rate in the western hemisphere – it is over 30 per cent. Raising petrol prices would only push this higher.

Another formidable barrier is that such a move would be hugely unpopular – subsidised petrol has existed in Venezuela for decades and is now practically considered a birthright.

Analysts say Mr Chávez is not willing to risk a backlash with regional elections approaching in November. Memories of the 1989 riots triggered by a rise in petrol prices, which ultimately precipitated the downfall of the government, remain fresh.

The president publicly branded the subsidy as “disgusting�? early last year and Gregory Wilpert, an academic sympathetic with Mr Chávez, says the government remains in search of a way to increase petrol prices without affecting the poor, its core constituency. “So far they haven’t come up with a good plan,�? he says.

It certainly will not be easy – with prices so low for so long, any meaningful adjustment would inevitably have a significant impact.

“Although a small increase in petrol prices may not be too politically costly, a rise big enough to really get rid of the distortions that the subsidy currently produces could certainly be damaging,�? says Tamara Herrera, an economist at Caracas-based Síntesis Financiera.

To make matters worse, Venezuela’s economic boom, triggered by high oil prices, has stimulated consumption across the board.

Car sales in particular have soared, not least because cars have become a form of investment in an environment of negative real interest rates. Chronic traffic jams have become a part of daily life.

With estimates of domestic consumption ranging from 550,000 and 780,000 barrels a day, Venezuelans consume anything from a fifth to a third of total oil production.

The subsidy also creates problems by in effect diverting money away from investment in projects that would diversify the economy away from its dependence on oil, as well as from social programmes, which are the keystone of Mr Chávez’s popular support.

http://www.ft.com/cms/s/0/d1ec8ed8-46c8-11dd-876a-0000779fd2ac.html

By tasco66 on Jun 30, 2008, 13:24 in Politics & the war.

tejasmarcos says on Jun 30, 2008, 18:57:

good story. that is one hell of a subsidy...

trying to walk a straight line on sour mash and cheap wine...

0 funny, 0 helpful.

miamimike says on Jun 30, 2008, 20:33:

Venezuela is by FAR not the only country doing this--Saudi Arabia(our so called 9/11 friends) do it, Mexico(also friends?) also but to a lesser extent. No anomaly here in Venezuela,,,

"Wait a minute. What did you just say? You're predicting $4-a-gallon gas? That's interesting. I hadn't heard that." -- Feb. 28, 2008 --George W. Bush, Washington, D.C.

0 funny, 0 helpful.

kalder says on Jul 1, 2008, 00:21:

"A tank can be filled for as little as $1.50"

Not so in London. That amount would fill a beer glass. :(

"kalder- have you ever had a woman?"--Sam Salmon

0 funny, 0 helpful.

viajero123 says on Jul 1, 2008, 01:24:

Where can I fill a beer glass for $1.50, or 75p??

0 funny, 0 helpful.

tasco66 says on Jul 1, 2008, 05:25:

"Venezuelans pay just 3 to 4 cents for a litre of petrol"

Miamimike, do you know what is the cost of a litre of petrol in Mexico?

And Saudi Arabia and Mexico do not claim to be the new “socialist model" of the world

Bravo, Presidente Uribe for the perfect operation!

0 funny, 0 helpful.

bamacellist says on Jul 1, 2008, 06:23:

Traffic jams were a part of daily life in Caracas 25 years ago. It's frightening to imagine it may be worse now. Historically there have been protests and riots as a result of even quite nominal gas price hikes, although there was one not so long ago that didn't cause any troubles, but the government had publicily expressed concern. Miamimike, you say "FAR not the only country doing this" and then list exactly two, making some cryptic reference to them being "our friends". What is your point?

"The future is much like the present, only longer."

0 funny, 0 helpful.