Extreme gasoline subsidies lead to extreme gasoline consumption.
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).
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.
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.
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is Faculty Director of the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Faculty Research Fellow at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. Prior to joining Haas in 2009, he was an assistant professor of Economics at the University of Michigan. 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.