We’ve all spent the best part of a decade wondering at the economic lunacy enacted in Venezuela. It’s so bad that inflation is expected to be 1 million (yes, that’s 1,000,000 %) percent this year. The minimum wage is also the median wage and that appears to be worth $4 a month or summat. It’s really an incredible piece of wrecking in a country with the world’s largest oil reserves. One of the things which has brought it to this pretty pass is the government’s habit of handing out the petrol, the gasoline, for free. That they’re to reverse this policy is indeed a sensible piece of economics, an event so rare that we should indeed note it:
President Nicolas Maduro said Monday that some of the world’s cheapest petrol that Venezuelan drivers enjoy will soon be sold at world market prices to combat rampant smuggling.
“Gasoline must be sold at an international price to stop smuggling to Colombia and the Caribbean,” Maduro said in a televised address.
The smuggling will obviously be an issue but it’s by no means the real reason they’re doing this:
Maduro said the government would still provide direct subsidies to citizens holding the “fatherland card”, a state-issued identification card that the government uses to provide bonuses and track use of social services.
There’s also that, by being selective with the subsidies then there’s more political power to be had over people. Show you love the regime or no subsidised petrol for you muchacho!
Venezuela loses $18bn to fuel smuggling annually, according to government figures. President Maduro says adapting Venezuelan fuel prices to international levels will stamp out smuggling.
While it’s true that world prices will curb the smuggling – and even that $18 billion is a lot of money – that’s not what will be the major benefit.
Effectively the Venezuelan state doesn’t charge for gasoline. Sure, the national monopoly delivers it to the gas stations. But they’ve – in the past at least – known that running the gas station costs more than the gross revenue from the sales of the stuff. So, the tankers turn up, fill the tanks at the station, then never invoice for it.
The loss in state revenue is the entire gasoline or petrol bill for the entire country.
But it gets worse than this. Actual Venezuelan crude isn’t all that good to refine into petrol. It’s too heavy. Sure, it can be done, but it’s more efficient to sell the crude then buy in petrol made from other crude. And given that gasoline is free Venezuela doesn’t have enough refining capacity to produce enough anyway. So, yes, one of the world’s largest oil exporters imports petrol.
They, quite obviously, pay full world price for this gasoline imported. Which they then give away as above. And it’s that which is the real hole in the government accounts, combined with not charging for the domestic stuff anyway.
One report – take it as you wish – says that this whole process and system costs Venezuela $60 billion a year in lost government revenue. And the honest truth is that if Venezuela had $60 billion more in government revenue then it wouldn’t be bust.
The first thing that will have to be done when the Bolivarian socialists exit the stage is to put the Venezuelan gasoline supply system on world prices. It’s a good idea, even a great one. So, we should celebrate that even the Bolivarian socialists have woken up to it, right?