Tuesday, October 30, 2007

Venezuela and the "Anti-Pigou" Club: The Consequences of Cheap Gas

President Hugo Chávez may not name Greg Mankiw to be his Secretary of the Treasury. If you are a fan of cross-country comparisons, then President Chavez's "low" (i.e negative) gas taxes are helping to sketch out a demand curve. While environmentalists want higher gas taxes to help "green" the vehicle sector and reduce aggregate greenhouse gases, President Chavez may need to reduce his subsidies to reduce a budget deficit. This article claims that both Iran and Venezuela face the challenge of a populist "freakout" if the entitlement of cheap gas is taken away from the people.

October 30, 2007
Venezuela’s Gas Prices Remain Low, but the Political Costs May Be Rising

By SIMON ROMERO
CARACAS, Venezuela, Oct. 29 — In a country moving toward socialism, the beneficiaries of government largess here are still people like Nicolás Taurisano, a businessman who dabbles in real estate and machinery imports. He is the proud owner of a Hummer.

Motorists in the United States smarting from rising gasoline prices, take note: Mr. Taurisano pays the equivalent of $1.50 to fill his Hummer’s tank. Thanks to a decades-old subsidy that has proven devilishly complex to undo, gasoline in Venezuela costs about 7 cents a gallon compared with an average $2.86 a gallon in the United States.

“It is one clear benefit to living in an otherwise challenging country,” said Mr. Taurisano, 34, who also owns a BMW, a Mercedes-Benz, a Ferrari and a Porsche.

Many Venezuelans consider the subsidy a birthright even though it bypasses the poor, who rely on relatively expensive and often dangerous public transportation. Economists estimate that it costs the government of President Hugo Chávez more than $9 billion a year.

Critics of Mr. Chávez, and the president himself, agree that the subsidy is a threat to his project to transform Venezuela into a socialist society, draining huge amounts of money from the national oil company’s sales each year that could be used for his social welfare programs.

Gasoline prices have often been a taboo subject for Venezuelan governments. There are memories of the riots in 1989, in which hundreds, perhaps thousands, of people died after protests set off by an increase in gasoline prices that resulted in higher transportation costs. That instability helped set in motion a failed coup attempt by Mr. Chávez in 1992, which first thrust him into the public eye.

After his re-election to a six-year term last December, when his political capital was abundant, Mr. Chávez called the gasoline prices “disgusting” and said his government was planning to raise them with a measure “financed by those who own a BMW or a tremendous four-wheel drive.” But he turned his attention to other matters, avoiding the touchy subject.

The link between social peace and gasoline so cheap it is almost given away is evident to many motorists. “If you raise gasoline, the people revolt,” said Janeth Lara, 40, an administrator at the Caracas Stock Exchange, as she waited for an attendant to fill the tank of her Jeep Grand Cherokee at a gas station here on a recent day. “It is the only cheap thing.”

During an oil boom that is lifting the incomes of both rich and poor, Venezuela is grappling with Latin America’s highest inflation rate, about 16 percent. The local currency, the bolívar, has plunged almost 50 percent in unregulated trading this year, reaching a record low of about 6,000 to the dollar in October (the official rate is fixed at 2,150 to the dollar.) Gasoline is one of the few products subject to price controls here that is in relatively ample supply. Newspapers have been filled recently with tales of consumers struggling to find milk. Last month, eggs were scarce.

Economic uncertainty makes it harder to tinker with fuel prices because a small increase could cascade. There could be an impact on the poor, with higher costs for food and other goods for which transportation costs are important, said Francisco Rodríguez, a former chief economist at the National Assembly.

One option is to keep the price of diesel cheap, because it is used in most freight and public transportation, while raising gasoline prices for relatively prosperous car owners. Another idea is to give transportation vouchers to people in poor neighborhoods.

“We are gradually moving toward an economic storm because of our addiction to cheap fuel,” said Orlando Ochoa, an economist at Andrés Bello University in Caracas.

Scholars trace the origins of Venezuela’s subsidy to the 1940s, when leftists imposed caps on gasoline prices after overthrowing the government of Gen. Isaías Medina Angarita. Because profits on sales of gasoline went to foreign oil companies at the time, the measure was seen as a way of redistributing oil revenues to Venezuelans.

Leaders were forced to raise prices in the 1980s and ’90s in the midst of financial distress. But Mr. Chávez has been hesitant to raise gasoline prices since his presidency began almost nine years ago.

Venezuela is not alone among oil-rich countries grappling with subsidized gasoline. Iran, a close ally, was shaken by unrest in June when its government rationed gasoline, which cost 34 cents a gallon at the time. But a thriving car-buying habit rivaled by few nations is forcing the government here to sell greater amounts of cheap gasoline.

Vehicle sales in Venezuela climbed 49 percent in the first nine months of the year from the same period last year, in part because cars are seen here as an investing hedge against economic uncertainty. Not only has the bolívar dropped in value, but there is also concern over real estate as squatters are allowed to take control of vacant properties.

Fuel smuggling into neighboring Colombia, where prices are much higher, is also rife. Domestic fuel consumption is up 56 percent in the past five years, to 780,000 barrels a day, said Ramón Espinasa, a former chief economist at Petróleos de Venezuela, the national oil company. One-third of oil production now goes to meet the subsidy, he said.

Petróleos de Venezuela has disputed such estimates but recently stopped providing public figures on domestic fuel sales. A spokesman at the company said officials were not available to comment on the matter.

Despite government efforts to open the market to car manufacturers from Iran and China, bulky, gas-guzzling sport-utility vehicles from the United States remain among the most sought-after automobiles here.

Perhaps the most coveted S.U.V. of all in Venezuela is the Hummer, an ethical quandary for Mr. Chávez.

“What kind of a revolution is this?” the president said on his television show this month, after a report here that General Motors was planning to import 3,000 Hummers to meet a rising demand. “One of Hummers?”

“No,” he said with the angry tone of a schoolmaster, answering his own question while announcing a measure that makes it more expensive to import Hummers and other luxury items like whiskey. “This is a revolution of truth.”

José Orozco contributed reporting from Caracas.

1 comment :

Anonymous said...

^^ nice blog!! ^@^

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