## How Cheap is Gasoline in Venezuela? Another Reality Check

January 5, 2011

After a few discussions with readers, I decided to do another reality check on the price of gasoline in Venezuela. For all intents and purposes, it is free, no cost, zippo, as the picture above demonstrates.

I filled my tank yesterday. I used 93 octane, unleaded, which in Venezuela costs Bs. 0.097 per liter as you can see above in the green square.

Now, let me explain that Bs. 0.097. With the latest devaluation, the lowest exchange rate available is Bs. 4.3 per US\$, which menas that a liter of gasoline in Venezuela is:

(Bs. 0.097/Bs. 4.3)= 0.0225 US\$ cents

A number so small, that it is hard to relate to. Try 8.5 cents a gallon, yes US\$ 0.085 per gallon or 35 times cheaper than the \$3 gallon which prevails today in the US. Think about it, 35 times cheaper!

That is why I prefer for you to look at the other number: I got 43.27 liters for Bs. 4.2, or I filled my tank for less than a US dollar, exactly 97.6 cents.

Of course, there are exchange rates which are worse than Bs. 4.3 per dollar, like the Central Bank’s SITME system, which is Bs. 5.3 or the “forbidden rate”, which are even higher. If you use those, it is even cheaper.

Let’s put it in perspective: A bottle of water of 300 ml. or so, costs Bs. 7, more that my tank of gasoline. A can of Coca Cola about Bs. 6 or 7, also more than my tank of gas. I had a salad today, Bs. 50, ten times a tank of gas, well actually 11.9 times if you want to be precise.

I have a brother who fills his motorcycle with Bs. 0.45, gives the attendant Bs. 1 and tells him to keep the rest. The other day, my bother only had a Bs. 10 bill, gave it to the attendant and he said, no, it’s ok. The gas is indeed free!

So, if you double it, it is still free. Zero impact.

Think about it a different way: A barrel of gasoline is about 203 liters. It sells in Venezuela for US\$ 4. It costs to produce at least US\$ 20 at the new “low” exchange rate. Venezuelans use about 800,000 barrels of gasoline a day, times 365 times \$16 of production subsidy is about US\$ 4.6 billion. And I am probably low in the estimate. Of course, we could export it too and even make money. What a capitalist concept!

But think. Who owns cars? Rich people. Poor people go in buses. The impact of a one dollar tank of gas on the ticket price is zilch, zero, ok, it’s 1x 10-3, basically irrelevant. For the rich, it is a nice subsidy. Traffic is hell, so in the end we pay for it anyway.

Get the picture?

Evo Morales increased the price of gas from about 50 cents a gallon to 90 cents a gallon. He had to back track. But he went back to prices which are six times higher than in Venezuela, he wanted to make it almost twelve times more expensive.

This goes back to my old question: Can we insert a little rationality into our system, please!!!

Note added: Reader Lazarus, who knows the stuff, does the calculation in the comments for the size of the subsidy, here is his conclusion:

The loss opportunity cost to the country? Estimating, conservatively, 500,000 bbl per day internal consumption, if sold at the international market price of ~\$120 per barrel of refined product, less the \$3.50 actual sales prices, is about \$58 million per day (BsF 267 million). Annually comes to \$21 BILLION.

As he says, you could build a lot of stuff with that amount.

(By a remarkable coincidence, both Caracas Chronicles and Setty discuss the same topic today from different angles, maybe we should send all three posts to Ramirez and someone in the Government who speaks English)

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5. […] Gas is so cheap (free really) in Venezuela, that it is difficult to talk about how much a liter costs. So, we go back to a picture I posted in May 2011: […]

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Oil companies control the worlds governments. Making us all their slaves by monopolization of the worlds energy. Wake up people!

11. stretch Says:

Would some Americans voluntarily trade freedoms for \$.10 gasoline? I think yes.

12. […] a vehicle is irrelevant when we buy or expostulate a vehicle in Venezuela, pleasantness of a crazy 8.5 cents per gallon policy by a Venezuelan Government, given Chavez has nonetheless to boost a cost of gas even once during […]

13. […] cost of fueling the car is irrelevant when you buy or drive a car in Venezuela, courtesy of a crazy 8.5 US cents per gallon policy by the Venezuelan Government, since Chavez has yet to increase the price of gas even once during […]

14. […] us in his pedagogical tone, that the Government subsidizes 90% of the price of gasoline, a topic we have covered many […]

15. moctavio Says:

That is the 87 Octane gasoline price

16. Philip Says:

In the photo, could you tell me what is selling in the orange box with a price of Bs 0.07?

17. moctavio Says:

Sorry, most countries people pay for what they use, we have been accostumed to be “malcriados ” in the belief that we are rich. We are poor. This is not a social problem, these subsidies favor the rich not the poor. Gasoline can not be free as it is, The true “social” cost is that PDVSA will go bankrupt this way, then you are going to see the true social cost.

There is no way to justify the current price of gasoline in Venezuela, it is shameful, it is a disgrace, it is in the end, the Devils Excrement at work, our minds have been seduced by the ease of life. It is a subsidy to the rich, nothing technocratic or social about it.

18. Fabio Bertozzi Says:

Miguel, you are evaluating this thing as a tecnocrata only. Increase of gas in Venezuela has a political and social cost (and Evo is already suffering some political cost with a simply attempt). In my opinion the goverment could not control several cost increases (transportation, goods, maybe food) if they increase the gas cost. They have created some alternative things like the GNV project several years ago (I think it was CAP II or Caldera) and very recently they have rewamped it again with the new name of Autogas. This time with car manufacturers selling some models with the dual system. And also you fail in the analysis by not counting the thousands of motorcycles that low income people have. Again, this has a social impact that is an important variable to consider. It is a subsidy to everybody that has something with a gas engine…even the guy that cut the grass at home…

19. Alek Boyd Says:

A ver si entiendo esto…

Miguel, you argue that gas in cheap, in fact free, and that the regime bears the cost of a huge subsidy that benefits, mainly, the rich. You, and many others, decry that economics is not the forte of chavismo, which could benefit from some expert financial advice.

The increase, or not, of the price of gasoline in Venezuela is a consideration that is pondered upon on political grounds. On economic grounds, there’s consensus that it doesn’t make sense. With the money that the regime could save by scrapping the subsidy, many things could be done, among which direct cash transfer to poor mums with children, etc. This is something that was proposed by Rosales (Mi Negra), and I think I remember having read here, and in other blogs, how insane the idea was. Asking mums to keep children at school, which eventually will lead to illiteracy rate drop and education level increases, is not a sound political plan for a populist regime that’s sustained, mainly, on people’s ignorance.

Then in Venezuela everything, but gasoline, has prices that are more expensive than like stuff in industrialised countries, when compared to income. Inflation is the highest in the continent due, mainly, to political decisions that affect the economy. So the regime could well think “given that due to our policies Venezuelans are being ripped off right, left, and center, let them have cheap gasoline.”

But then, a “political scientist” that dabbles in economics, argues that, well, the subsidy should really be eliminated, and some poverty elimination plan ought to be implemented with the resulting income, when not two weeks ago he was lambasting perhaps the only politician that dared out of the political realm and into the economics, took the necessary steps to correct this most absurd subsidy, and to top it all of, actually hired true financial nerds to carry out the task.

So could someone please explain this one to me?

20. moctavio Says:

Thank you, love the rational discussion you introduce from Aruba.

21. marypuchy Says:

You are a bunch of iggnorant fuckers…………………….. assholes in its purist definition………….

22. Roy Says:

Francisco and Miguel,

And you haven’t even included the added benefit of reducing domestic usage and consumption. At the current prices, I certainly don’t plan my day around conserving fuel. If the cost were reasonable and rational, people would automatically reduce consumption. This would also save some wear and tear on the roadways.

23. Cesar Says:

One of my favorite dark hobbies when I return from a trip to Venezuela is tell my European friends that you can fill the car with fuel for about 0.50 euros (I use the unmentionable to convert because it is the more realistic). They almost always say “jeez, why are you here? 50 cents a liter? Cheap!!” Then, with a smug face I tell them that’s 50 cents PER TANK. The fun part is listening to the brief silence, the gasp, and finally seeing the wide-eyed, dislocated face while they incredulously yell “PER TANK!!!”. It would crack me up every time if it weren´t so painfully absurd, hopeless, and more than a little embarrassing.

24. carne tremula Says:

you know what is funny? natural gas for vehicles … they give it away both the fuel and the conversion kit.

a barrel is 42 gallons , about 161 liters,,,, not 203 liters,,, that is a 55 gallon drum,,,, however it is still nearly free,,,, PDVSA has not and will never be able to pay it’s bills,,, contractors are disappearing fast, production is plummeting, with no bottom in sight

26. Mick Says:

I guess just goes to show that Hugo is not really robbing from the rich to give to the poor. He is robbing from his enemies to give to his friends, and Venezuela is caught in the middle.

27. Bruni Says:

It is a great idea to send the three posts to RR. Although I think he knows about
the huge subsidy gasoline prices are in Venezuela.Why not send the posts directly to Chavez?

One tiwtter bit.ly to @chavezcandanga and that’s it!

28. moctavio Says:

Thank you Lazarus, you are getting a partial upgrade to the post and a beer anytime you are in Caracas. Or two.

29. Lazarus Says:

Okay, this topic get’s me going. I remember HC raving about El Pueblo receiving no benefits from Venezuelan crude production, what a crock with the lowest transportation costs IN THE WORLD! Including taxi, buses, cars, even planes. That was past of the justification to start the oil industry nationalizations, and we know what a mess that is now.

Regarding real costs.. the cost of 1 bbl of gasoline (refined crude) would be \$08.5 x 42 gal/bbl = \$3.50 / bbl.

Production, processing, transporations and refining costs are around \$10 / bbl, so the LOSS per bbl is about \$6.50. Effectively it isn’t free, the government is PAYING Venezuelans to fill up to the tune of \$6.50 / bbl. Or in Miguels case, the government effectively paid him about \$1.75, or BsF 8 to fill up 43 liters.

The loss opportunity cost to the country? Estimating, conservatively, 500,000 bbl per day internal consumption, if sold at the international market price of ~\$120 per barrel of refined product, less the \$3.50 actual sales prices, is about \$58 million per day (BsF 267 million). Annually comes to \$21 BILLION.

That would build alot of houses, pave alot of roads, supply alot of hospitals, build a lot of schools, and even have a little left over to buy some tuna boats and yachts.

30. sapitosetty Says:

And a nice German has already done the communications strategy work. See:

http://settysoutham.wordpress.com/2011/01/05/bolivias-fuel-price-increase-analyzed/

31. […] I see that the Devil’s Excrement and Caracas Chronicles blergs also hit this theme today. Possibly related posts: (automatically […]

32. Francisco Toro Says:

are you crazy? Don’t try to think like them, you’ll give yourself an aneurism!

33. moctavio Says:

The crazy thing is that they increase the exchange rate to generate US\$ 3 billion at most (in Bs.) while raising gas a little would have had much less impact on inflation and get them a lot, I really think they need a reasonably capable economist to calculate these things and figure out trade offs.

In fact, you could schedule four 50% increases this year and it would have little effect on prices and generate US\$ 2 billion.

I know it is low, I was trying to think like them, only up to the cost of production which I am sure is higher than US\$20, at 30% inflation per year local costs are huge now.

34. Francisco Toro Says:

Also, Miguel, your estimate is really low because it takes production costs as a benchmark. I think opportunity cost is the more relevant metric: the real earnings foregone by selling internally rather than at the price you *could* be getting abroad. Benchmarking to opportunity costs gives a way higher cost estimate.

Still…so many angels on the heads of so many pins…it’s the difference between a really, really crazy subsidy and a really, really, really crazy subsidy…

35. Francisco Toro Says:

Yup, we hit the same theme on the same day.

The key, I think, is to make it explicit to people what they’re foregoing with the money the government wastes on this nutsoid subsidy. I mean, if you just hike the price of gas, but people don’t get anything in return for it, it feels like a ripoff.

That’s what happened to CAP: he totally failed to make the trade-off involved visible. Instead, it just felt like he was putting the government’s hand in your pocket.

This is why I think the discussion needs to be hitched to a discussion of Conditional Cash Transfers for barrio mom’s who keep their kids in school. “We’re going to raise the price of gas and, in return, we’re going to send you a fat check if you make sure your children get a proper education” is a vastly different proposition from “we’re going to raise the price of gas and there’s nothing in it for you.”

EVERY time we talk gas price, we should talk compensatory scheme in the very next breath.

36. Roberto N Says:

Last time I was in Venezuela with my family, we filled the rental car up for 2.5 BsF. When I told the kids how much it cost in \$\$ they said: “Daddy, drive around the block and let’s do it again!”.

That was the only fun part of the whole trip……….

37. m_astera Says:

I think you already know how I feel about it, Miguel. The oil and the money from it belong to the people of Venezuela, not the government. The government does not need more money to waste and steal. End wasting and stealing by the government and its cronies and there would be no debt problem. Same goes for any other country I know of; Venezuela just happens to be more obvious about it to the casual observer.

Subsidizing some basic food items, electricity, and gasoline are not the reason for the economic mess either.

• venexolano Says:

does this mean that venezuelans that are now living overseas will get a check?

38. moctavio Says:

I think is much more, dont have the last data with the devaluation included.

39. geronl Says:

SO basically the people of Venezuela are being ripped off by nearly \$5 billion a day??

40. moctavio Says:

No, that is precisely my point, increasing the price of gas by a factor of two does NOTHING to inflation. Gasoline has never been this cheap in Venezuela’s history. CAP raised the price to the export FOB price.

And I repeat, Caldera, who was unpopular raised the price to FOB export prices and nothing happened. It can be done.

41. “This goes back to my old question: Can we insert a little rationality into our system, please!!!” Wasn’t the Caracazo because of CAP wanted to make oil gas more sensible? I think that was the thing that started everything no?

My gringo husband was so shocked at the gas station in Venezuela, I think he took picts and everything of us filling a tank for nothing… ha

42. moctavio Says:

Why do you think Fernandez Barruecos and other Bolibourgeois began buying tuna boats in the East of Venezuela?

They added extra tanks to the boats, would go fishing with full tanks, drop fuel in Panama and come back with the tuna and the cash. Another great arbitrage opportunity.

43. Ken Price Says:

Just a thought: You can probably air mail me 1 liter cans of gasoline, and the total cost would be less than I’m paying at the pump currently. A new business for exporters in Venezuela? Loony Tunes.

44. Gordo Says:

Let’s see, if somebody could take rent a boat, exchange \$1000 on the black market, buy gasoline, take it back to USA or Europe, make \$70,000 profit on the sale, and did that one per month for a year… they would become a Millionaire?

45. Gordo Says:

Let’s see. If somebody could rent a boat, exchange \$1000 on the black market rate of Bvf 9.25, and buy gasoline with it. Take that gasoline back to USA or Europe and sell it. The would make about \$70,000 profit on the sell?

46. metodex Says:

MO, you always put things in perspective for my little brain.
Thanks dude-o.

what are you proposing anyways¿

47. island canuck Says:

Let’s see tank of gas = 1 beer here in Margarita.