The World’s Cheapest Gas? Not for Long

The World’s Cheapest Gas? Not for Long

Venezuela’s government is desperate for cash. It’s so desperate that it’s willing to question something few have dared to touch: the country’s massive gasoline subsidy.

The official price of a liter of 95-octane gas is 0.097 bolivars. At the official exchange rate of 6.3 bolivars per dollar, this amounts to $0.015. At the actual market rate, the price would require scientific notation.

For all intents and purposes, vendors have been giving gas away for free. This creates an enormous burden on the Venezuelan state: Conservative estimates suggest the annual subsidy is worth $12 billion, with most of it going to the better off (those who own cars).

Not surprisingly, the distortion in the price of gas has become the butt of jokes, with Venezuelans musing over how much a tank of gas costs in comparison to other things. For example, the price of a pack of cigarettes is the same as 12 tanks of gas. A half-liter bottle of mineral water costs as much as three tanks of gas.

The price of gas has been set in stone for the last 17 years, a period that has seen double-digit inflation every year. This begs the question: Why do Venezuelan politicians find it so difficult to let the market determine the price of gas?

The answer lies in the trauma Venezuelans endured the first time they tried to free the price.

There is a long-held tradition of setting the price of gas in Venezuela. The first time the government tried to do away with price controls, thousands of people took to the streets, protesting and looting. The two days of mayhem ended in a curfew that saw the government commit serious human rights violations.

The Caracazo, as the period is known, marked a clear watershed in Venezuelan political life. Until then, Venezuela had been a somewhat functional democracy. The riots, which took place all over the country, woke Venezuelans up to the deep problems that lurked beneath a veneer of harmony, glossed over with oil money.

Ever since then, the price of gas has become the proverbial "third rail" of Venezuelan politics. The last president who attempted to raise it was Rafael Caldera, Hugo Chávez’s predecessor. While Caldera did not face any riots for it, he left office with his popularity in the teens. Chávez, for all his bravado, never dared to touch it.

The consequences of the distortion are a textbook case of basic economics. Cheap gas is smuggled across the border to Colombia, where it fetches market prices. There are long lines at Venezuelan gas stations. The streets of Venezuela are clogged with gas-guzzling cars from the 1970s. (The photo above shows Venezuelan soldiers closing the border with Colombia as part of an anti-smuggling initiative.)

The government of President Nicolás Maduro has been hinting that it will tackle the problem. Officials have been talking about the heavy burden the subsidy places on public finance and about the distortions it imposes on the market. Although the government has announced plans to consult the public, it appears to have already made its decision. (The precise timing remains a mystery.)

One of the ironies of this move is that chavismo claims it was born as a movement in the aftermath of the Caracazo riots. These are the same people who, in congress and in the cabinet, have railed for years against "neoliberal" policies such as raising the price of gas.

They now appear to be learning, however, that reality is unavoidable. The government simply cannot keep financing everyone’s gas tanks.

The gas hike seems to be the brainchild of oil minister and economic czar Rafael Ramírez, who has been in full Orwellian mode lately. He has railed against the gas subsidy, saying that it amounts to enormous waste, and has even started talking about how it damages the environment. He has not once acknowledged that cheap gas is his own policy.

It’s not known when the government plans to raise the price. Local media is reporting that the new price could be 2.7 bolivars per liter — which would amount to an increase of more than 3,000 percent. The government claims this is the price that would cover cost of production, but falls far short of international prices. It is not planning on liberating the price, merely "adjusting" the price control. But with inflation in the high double digits, it won’t be long before this new price is perceived as ridiculously low as the current one.

Regardless, Venezuelans’ hard-pressed personal finances are about to take a massive hit. One wonders if they are simply going to grin and bear it, or if this will spur them to take to the streets once again.

Juan Nagel is the Venezuela blogger for Transitions, editor of Caracas Chronicles, and author of Blogging the Revolution. Read the rest of his posts here.