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Venezuela's fuel subsidies pollute, paralyze its cities

By Rory Carroll
THE GUARDIAN, CARACAS
Sunday, Jan 20, 2008, Page 12

A woman embraces Venezuelan President Hugo Chavez, left, as his Honduran counterpart Manuel Zelaya, right, delivers a speech near Government House in Tegucigalpa on Tuesday. Chavez was in Honduras on an official visit to sign a subsidized oil supply agreement. PHOTO: AFP

There is a world where oil costs US$100 a barrel, where motorists wince as they fill up the tank and where energy efficiency is a mantra.

And then there is Venezuela.

At a Caracas gas station last week, Gloria Padron, a pediatrician, ticked off items that would cost about the same as the 60 liters of fuel gurgling into her Land Cruiser.

"Let me think. A Magnum ice cream. A cup of coffee. A cheese and ham arepa [sandwich]. Small stuff like that. Can't say I've ever really thought about the price. Why would you?" Padron said.

When a liter costs barely US$0.02, and filling the tank of a 4x4 costs US$0.82, it is a fair question. Gas is so cheap here -- reputedly the cheapest in the world -- as to be almost free.

So while oil-importing nations appeal for relief (US President George W. Bush called in vain this week on Saudi Arabia to increase its output so as to bear down on prices), major exporters such as Venezuela bask in their immunity from the petroinflationary pain. Venezuela has the seventh-largest oil reserves in the world and gas is lavishly subsidized.

"If it gives us nothing else, at least the government lets us have our own petrol [gas] this cheap," said Padron, 44, revving her engine. "It may be crazy and have no logic, but I'm not complaining. Nobody is."

That is the problem. The subsidy warps the economy, drains government coffers, rips off the poor, pollutes the air and paralyzes cities with traffic jams. Yet it is hugely popular and the government dares not end the insanity.

"It is difficult to go from this system to something more rational," said Mark Weisbrot, an economist with the Washington-based Center for Economic and Policy Research. "People think they know how cheap the oil is and that it is theirs. It is very deep in the culture."

Venezuela, which introduced the subsidy as a populist measure in the 1940s, is probably the world's most extreme case of a gas-guzzling dream becoming a policy nightmare.

A lack of rigs and other problems has reduced the output of the state oil company, Petroleos de Venezuela, just as domestic consumption has soared to 780,000 barrels a day. The subsidy costs the government around US$8.9 billion annually. It also encourages a brisk trade in contraband gas across the Colombian border, where prices are higher.

A consumer boom has doubled the number of cars on Venezuela's roads, with 500,000 sold last year alone.

"None of the advertisements talk about fuel efficiency," said Daniel Guerra, the manager of a Ferrari dealership in Caracas. "People have been spoiled for so long with the subsidy that when it comes time for a reality check they don't understand."

As a result, streets are filled with new SUVs, as well as wheezing 70s-era sedans, aggravating smog and gridlock.

Some economists call the subsidy "Hood Robin," because it steals from the poor and gives to the rich by favoring relatively wealthy car owners above the poor who rely on public transport.

Venezuelan President Hugo Chavez railed against it last year, going so far as to label the inequity "disgusting." He also chided western countries for consuming so much oil and depleting a non-renewable resource. The self-styled revolutionary socialist, however, has not followed through on his promise to raise prices at home.

"That might make economic sense, but could risk his already dwindling support," said Michael Shifter, an analyst with the Inter-American Dialogue thinktank. "In a context of growing fissures within his own coalition, it is doubtful Chavez would be too eager to reduce gas subsidies."

When a previous government raised prices in 1989, the resulting riots left hundreds, possibly thousands, dead and destabilized the political system. A price rise now could worsen the galloping 22 percent rate of inflation by having a knock-on effect on the cost of haulage and the public transport system.

Chavez's extensive oil diplomacy, which subsidizes exports to friendly countries, notably Cuba, has further sensitized Venezuelans to prices at the pump.

"You can't give a stranger a present of something from your own home and then deny it to your children," said Alfredo Lozano, 55, a decorator, as he filled his 4x4. "The government has to keep the price low."
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