Venezuelan Gas Guzzlers

Since reading Catherine’s post last week (link here), I have been thinking a lot about Venezuela’s gasoline subsidies. Venezuela has the cheapest gasoline on the planet. At official exchange rates, gasoline costs only $.06 per gallon; at black market exchange rates gasoline is even cheaper. Venezuela’s gasoline is so cheap it makes Middle Eastern gasoline look expensive – Saudi Arabia ($.62), Kuwait ($.87), and even Iran ($1.25).

GasDemand

I wanted to understand this better, so I dug into the data. In the figure above, I plotted gasoline consumption per capita against gasoline prices in Latin America. These data come from the World Bank from a survey conducted in November 2010.  Prices include all relevant taxes.

Venezuela is a remarkable outlier. Ecuador and Bolivia also subsidize gasoline, but not to anywhere near the same extent. In fact, most countries in Latin America have substantial taxes on gasoline. Gasoline consumption per capita in Venezuela is 40% higher than any other country in Latin America, and more than three times the regional average.

Venezuela’s high level of gasoline consumption is especially striking given that, according to the World Bank, there are only 147 motor vehicles per 1000 people. Somewhat surprisingly, looking across Latin America there is essentially no correlation between the number of vehicles per capita and gasoline prices. Vehicle ownership seems to be almost entirely driven by income.

Motor Vehicles in Latin America

So what explains Venezuela’s high level of gasoline consumption? Venezuela has one of the least fuel-efficient vehicle fleets in the world. When oil prices spiked during the 1970s, Venezuelans imported large numbers of low-MPG cars, mostly from the United States, and many of these vehicles continue to be used today. Almost anywhere else in the world, these vehicles would have long ago been retired to scrapyards. But in Venezuela they are cheap to maintain, and very cheap to run thanks to billions of dollars per year in gasoline subsidies.

“We like our cars to be like tanks in this country, meaning they should be huge, comfortable, and preferably manufactured in the United States” - Miguel Delgado as quoted in NYT, December 12, 2010

“We like our cars to be like tanks in this country, meaning they should be huge, comfortable, and preferably manufactured in the United States” – Miguel Delgado as quoted in NYT, December 12, 2010.

For more on Venezuela’s gasoline subsidies, see  here and here.

About Lucas Davis

Lucas Davis is an Associate Professor of Economic Analysis and Policy at the Haas School of Business at the University of California, Berkeley. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.
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13 Responses to Venezuelan Gas Guzzlers

  1. David Lea says:

    Great post. What do the sizes of the circles signify?

    • Lucas Davis says:

      Sorry, I should have clarified this. In both figures above, circle size is proportional to country population in 2010.

  2. My intial thought is to wonder how the price of cars (both initial purchases and maintainence) is factored into the equation, and the relative income level of the populace. While the basic theory of Supply & Demand seems vidicated here (lower prices lead to higher consumption), until you’ve normalized for other factors, you haven’t really proven anything here.

    • Lucas Davis says:

      To be clear, this figure is a scatterplot of the raw data. I’m not controlling for income or any other determinants of gasoline consumption. While I think the scatterplot is suggestive, I completely agree with you that it would be important to see how these relationships changed in a regression framework after controlling for income and other factors. Sounds like something that would be interesting for a future blog post. :)

  3. Leslie says:

    the binding constraint in Venezuela must be the cost of parking ;)

    • Juan Cristobal Nagel says:

      There are numerous other angles to this problem. The cost of parking is regulated, which has led to underinvestment in parking lots. Furthermore, people not only own gas guzzlers, but they *use* them more frequently. No parking space + lots of people riding around in old cars = huge traffic problems. The government can’t keep up with rising demand for infrastructure, and cannot invest in public transportation … because it is giving away gasoline for practically free.

      In fact, the gasoline subsidies are so enormous, one recent pro-government economist calculated it at $24 billion, which is about a quarter of the country’s federal budget. The policy is insane.

      • humberto vivas says:

        I’m curious to understand how the $24 billion petrol subsidy was arrived at , Opec shows Venezuela to use about 740.000 Bls per day on internal demand which turns into 260 million bls per year which at a $ 100 per bl converts into $ 26 billion per year in lost export revenue ( not counting the cost of producing the oil ) , if you add the cost of refining it , and of storing, transporting and distributing the product ( $6 per bl ?) then the cost of the subsidy mounts , not sure how to calculate the portion of the cost which is recovered from buying customers . Do you have any details ??

      • Daniel Urdaneta says:

        Simple. The regulated price of petrol is frozen since ’99. Factor in an accumulated inflation rate of 1800% or so over the period, and the result is the ridiculously low gas price we have nowadays.

  4. Terry says:

    I think I would be remiss without mentioning the amount of gas smuggled over the border and sold for huge profit.

    I have relatives in Tachira, who live within 5 miles of the Colombian border, and it is relatively common for people to fill up their gas tanks and then make a huge profit by selling them to Colombians up in some of the mountain roads. Civilians involved generally have to pay off the military or have some military contacts, because many militars run their own smuggling racket. In a few spots, the local FARC guerrilla also charge smugglers for safe passage and the right to use some mountain passes.

    This is undoubtedly going on in other border areas. Does it represent a significant percentage? Probably not, but who knows.

  5. Tino says:

    Great post, thanks much.
    Just a couple of comments here:
    1) Gas guzzlers? Yes, that may be true to some extent. But the data needs to be corrected for the large amount of gasoline that is consumed in city traffic, with vehicles in idle. Traffic in Caracas must be one of the worst worldwide. Caraquenios do actually spend hours in traffic everyday.
    2) The second issue is: there is a large disincentive in the country to buy newer, more modern, higher MPG type of cars. The price of new cars (or even used cars) is amazingly high. The price of insuring new cars is also high, as a consequence. Purchasing a new car in Venezuela -if you can get one- is going to be very costly. On top of that, driving new vehicles in Venezuela may make you a crime target, as driving new vehicles can be construed by some criminals as if you are a rich person (not a bad guess). So most people will want to keep their gas guzzlers.

  6. Mariano says:

    You should try with total_gas_consumption/total_vehicles on the Y axis instead of consumption per capita. You get a nice graph. Venezuela has a very high consumption per vehicle, presumably due to its inefficient vehicle fleet (no incentives to buy a Prius if gasoline is almost free). But countries with higher gas prices have a better consumption per vehicle (either people drive less or have more efficient cars). Also you should be more specific about the motor vehicles data since the World Development Indicators does not have complete records on number of vehicles for all latam countries after 2007.

  7. Pingback: Price at the Pump Worldwide | Energy Economics Exchange

  8. Pingback: Global Gas Guzzlers | Energy Economics Exchange

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