18 February 2016

Venezuela raises the petrol price by 6000%, and it’s still the cheapest in the world


As anyone with their eye on global markets will have noticed, the oil price has been plummeting. In the last few years it has dropped from $110 to less than $30 per barrel. Admittedly, the price has just risen to $35 following plans by Russia and Saudi Arabia to freeze output, but that would still have been unthinkably low last year.

And yet in this week’s topsy-turvy news, the government of Venezuela, everyone’s favourite economic disaster zone, announced it will raise the state-mandated price of fuel for the first time in 20 years. According to the BBC, the pump price of premium fuel will rise from $0.01 a litre to about $0.60.

No, the decimal point is not in the wrong place, and yes, that means that fuel will now be 60 times more expensive for Venezuelan motorists. For regular fuel, the price will increase by over 1000 percent.

This tells us several things about Venezuela’s economy. Firstly, the government controls the price of fuel. This should not be surprising, given that the Venezuelan government also controls the prices of bread, beef, milk, flour, and toilet paper.

Secondly, until this week the price of fuel was laughably, outrageously, incomprehensibly low. (The average global price for one litre of petrol is $0.95.) This makes driving a car or running a generator virtually free for Venezuelans, at least in theory. One does not need an economics degree to guess that Venezuela has consequently been suffering devastating fuel shortages (and a thriving black market, both domestically and abroad). In a cruelly ironic twist, in 2009 the then-president Hugo Chávez had to appoint a Minister for Electricity Shortages. And all this, from a country which has the largest oil reserves in the world.

Thirdly, Venezuela has managed to spectacularly mismanage its economy. Of course, this is not exactly news – headlines have been predicting economic Armageddon for Venezuela for months. But the decision to finally raise fuel prices just when consumers all over the world are enjoying a discount is proof that something has gone very badly wrong with Venezuela.

Of course, the two things are connected. Oil makes up 95 per cent of Venezuela’s export earnings, and the collapse in the price has meant the country’s finances have gone from bad to devastating. Reducing the subsidy is estimated to save the Venezuelan government $800 million a year. To put that another way, the government had previously been spending $800 million a year giving its citizens dirt cheap fuel, all the while going further and further into debt. The BBC reports that:

“According to the Bloomberg news agency, the state oil company Petroleos de Venezuela incurred $15.2bn in costs in 2013 to maintain Venezuela’s fuel subsidy.”

In his announcement of the emergency measures (which also include devaluing Venezuela’s currency, which will make crucial imports even more unaffordable), President Maduro tried to justify the change by pointing out that: “Venezuela has the cheapest gasoline in the world.  The cost is almost nothing.”

The fact that it is only now occurring to the President of Venezuela that this might be a problem does not inspire much confidence. The Guardian had branded Maduro’s measures as “free market reforms”, but then continues:

“But even with the rises, Venezuela’s petrol will still be the cheapest in the world, allowing Venezuelan’s to fill their tanks with high-octane gasoline for the equivalent of the price of three beers.”

The Socialist government of Venezuela has still not admitted that price controls do not work. Meanwhile the country faces $123 billion of external debt, people queue in the streets for their state-subsidised toilet paper, and gangs enjoy a lively smuggling trade in basic goods across the Colombian border. But at least Jeremy Corbyn is still on board.

Rachel Cunliffe is Deputy Editor of CapX.