Venezuela: Land of 12-Cent Gas

By subsidizing gasoline, Chávez spreads the oil wealth. But the cost of those cheap fill-ups is becoming hard to ignore

A line of cars waits to cross the Venezuelan-Colombian border post in the Venezuelan state of Maracaibo, on Mar. 6, 2008. Pedro Rey/AFP/Getty Images

by Peter Wilson

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Global oil prices zoomed up to $135 a barrel this past week. But that doesn't worry Roberto Morales, a 33-year-old Venezuelan businessman. Morales, who drives a compact Volkswagen Gol, still pays only $1.32 to fill up his car with 11 gallons of high-octane gasoline, thanks to Venezuela's subsidized fuel price.

"This is crazy but I'm not complaining," says Morales. "Gasoline here is cheaper than water."

He's not exaggerating. Gasoline prices in Venezuela are the cheapest in the world—1/15 the price of a liter of bottled water, and 1/25 the price of a liter of milk. Since 1998, Venezuela has kept the price of gas fixed at 0.097 strong bolivars a liter, or about U.S. 3¢ (lower octane is 0.070 strong bolivars). That means that consumers pay about 12¢ a gallon, or 1/33 of what their U.S. counterparts pay.

What It Costs

It's no surprise that President Hugo Chávez, who regularly excoriates Western consumers for their wastefulness, has had a hard time preaching to his supporters about energy conservation or alternative fuels. Gasoline consumption at home has risen steadily over the last decade and is now about 320,000 barrels a day, or about 14% of the country's current oil output of 2.3 million barrels a day. And thousands of barrels are lost daily through illicit gasoline exports to neighboring Colombia, Brazil, and Trinidad and Tobago. Still, oil consumption per capita is far lower in Venezuela than in the U.S.: about 23 barrels per day per 1,000 people vs. 69 in the U.S., according to NationMaster.com.

But Venezuela is paying a price for cheap gasoline. State oil company Petróleos de Venezuela is footing an $11 billion a year bill for underwriting and subsidizing the fuel. That's nearly double its 2007 net income of $6.27 billion. The cost of that subsidy, along with money it pays to underwrite government social programs, has forced Petróleos de Venezuela to borrow billions on international markets to cover investments.

"As domestic consumption and international prices increase, the price of keeping that subsidy in place is also rising," says Patrick Esteruelas, an analyst with New York-based Eurasia Group, which provides political risk analysis. "But the government is reluctant to raise gasoline prices now, especially at such a politically critical time."

A Political Hot Potato

Venezuelans go to the polls in November to elect state governors and mayors. Chávez is unwilling to take unpopular measures, especially as his approval rating has plummeted by more than 20 percentage points since 2006. The Venezuelan president is also still smarting from voter rejection last year of his proposal to rewrite the constitution, which would have given him more power. "His numbers are just beginning to stabilize now at between the low 40s and mid-40s in opinion polls," says Esteruelas. "For Chávez, this isn't the time to take any chances."

Petróleos de Venezuela is already facing problems meeting domestic demand, especially in the face of repeated accidents and shutdowns at its four domestic refineries. Programmed expansions at two of those facilities have been pushed back because of funding delays.

Venezuela is not the only country that spares its citizens from high oil prices through fuel subsidies. For oil-producing nations, subsidies are a way of sharing the natural-resources largesse with the population. Iran and Saudi Arabia rank as the second- and third-cheapest places to buy gas, at the equivalent of 40¢ and 44¢ a gallon, according to a survey by Associates for International Research. Both nations offer their citizens gasoline subsidies, though they are not quite as generous as Venezuela's.

But as prices rise, the pressure to pare back payments can be intense.