Debt Fu­eled

Amid low oil prices, gov­ern­ments are be­ing forced to lift bloated gaso­line sub­si­dies

Alberta Oil - - THE ASK -

smug­gling cheap gaso­line from Venezuela to Colom­bia was the re­gion’s high­est-mar­gin busi­ness. The peo­ple who sold sub­si­dized gaso­line, called pimpineros for the re­cy­cled jugs they used to store the fuel, could see profit mar­gins up to 60 times their orig­i­nal in­vest­ment. Venezuela, which has the world’s largest oil re­serves, has long sub­si­dized its gaso­line as a political seda­tive. At its low­est, gaso­line in the coun­try sold for as lit­tle as two cents (USD) per gal­lon at the pumps, com­pared to $1.25 per gal­lon in Colom­bia. Lo­cals of­ten pointed out that Venezue­lan gas was “cheaper than wa­ter,” ac­cord­ing to news re­ports.

But that changed in Fe­bru­ary af­ter the coun­try’s pres­i­dent Ni­colás Maduro an­nounced the first price hike in decades. The de­ci­sion had been fore­casted for over a year, and was fi­nally ap­proved along­side a cur­rency de­val­u­a­tion that dra­mat­i­cally weak­ened the bo­li­var. Shrink­ing rev­enues from Venezuela’s em­bat­tled oil sec­tor, which ac­counts for 96 per­cent of the coun­try’s ex­port rev­enues, blew a hole through the an­nual bud­get. The coun­try is now poised to de­fault be­neath mounds of debt and a lack of faith that the pres­i­dent will fol­low through on his prom­ise to make $10 bil­lion in bond pay­ments this year to pla­cate in­vestors. Some es­ti­mates sug­gest the coun­try’s GDP could shrink by as much as seven per­cent in 2016.

Heavy gaso­line sub­si­dies are the cause of some of Venezuela’s prob­lems, but con­sump­tion sub­si­dies in gen­eral are a global prob­lem. Ac­cord­ing to the In­ter­na­tional En­ergy Agency, the world spends US$550 bil­lion a year sub­si­diz­ing fu­els that tend to weigh down economies. Most econ­o­mists rec­om­mend cut­ting such sub­si­dies— though such a pol­icy would hurt the mar­gins of Colom­bia’s makeshift gaso­line mar­ket.

FOR MANY YEARS,

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