The blue bars are the government’s 2011 spending budget. The orange bar is our estimate of the opportunity cost of selling gas below the world price.
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Wow, can you send me that data?, my teacher showed me today how salaries as percentage of gdp has been constantly decreasing from 40% to 30%, and benefits were growing, data from the economist 1998-2009 period
Oh, the data is real preliminary for now. We’re working on it, consulting pretty widely. Estimating the parafiscal stuff (Fonden, fondo chino, etc.) is a bitch. But when we have a presentable, worked out spreadsheet, we’ll certainly publish it. Send me an email if you want to help…
Yes. (Warning, long post ahead, excuse the length svp!)
Gas subsidy is a bitch. However, this is a blog to discuss thinks, and with all due respect, this is overstating the obvious. What I would like to see discussed here is what to do to solve problem, no easy answer here.
That is, suppose Fran Toro becomes president of Venezuela on 2012 (not that I am anticipating your bid for presidency anytime soon, but I would rather avoid other political endorsements). What would you do to reduce gas subsidies ? In how long do you estimate this problem will be solved/ dealt with? What would you do to avoid massive riots and a hit in popularity so big that Hugo Chavez II is elected president ?
First, I have to say that in my opinion, any rationing or income discriminatory policy when filling your gas tank is out of the question for reasons of enforcement and obvious second-hand effects that will be harmful for the economy. I believe that first we should look into a second-best (http://en.wikipedia.org/wiki/Theory_of_the_second_best) tax that is escalating on income, type and number of cars owned, and time since those with higher income or more cars tend to consume more fuel; the size of the tax depends on what percentage of the subsidy we would like to cover but I am anticipating it will have to be big if we want to make a difference. While doing that, the government should a) heavily invest in public transportation that is more dependent on electric power and that will probably have other positive externalities on the economy and b) promote electric or natural gas private transportation, maybe through easier financing or even subsidies and, off course, investment in these sectors. The tax money should be used to both finance the subsidy and the alternative plan.
The first tax should reduce gas dependence to a huge extent. Ideally, richer people should be switching to having less cars or buying cars that are less dependent on oil. Eventually, the government should gradually start reducing the gas subsidy and, if the aforementioned policies are successful, people’s reaction would be nothing compared to what would happen today. I am obviously not saying that this is THE solution, and I am sure implementing it will being several mishaps, but I do want to hear what others are propose and not only criticism, specially since we should increase the discussion on how to rebuild the country after 2012… whatever policy is enacted, it should be extremely forward looking because oil will not be any easier or cheaper to get in the future, and if my hopes are right, the world should start getting greener and greener on the decades to come.
Caveats: i. The tax could harm industries, but thus there should be breaks on it for some sectors. ii. Tax enforcement… if someone can say more about this it would be great because I have heard mixed accounts on the topic.
Oh that sounds complicated/expensive to implement.
My idea is much simpler: phase in a large, generous Conditional Cash Transfer program and explicitly link it, in your communications, explicitly with the gas price hike:
http://caracaschronicles.com/2011/01/05/leadership-on-the-gas-subsidy/
How about this – the price of fuel will go up each day according to last month’s rate of inflation + 1%.
In other words, if last month’s inflation was 1%, the price of oil will go up 2% this month, a little bit each day.
It would create incentives to lower the inflation rate, while at the same time put a cap on the increase in the price of oil. The government can sell it as a minuscule adjustment, and over time the real price of gas comes back to sensible levels.
One measure of the ABSOLUTELY PSYCHOPATHIC scale of the current subsidy structure is that if you did it that way, it would take you 20-25 years to end the subsidy!
The back of my envelope suggests you’d need a 3.75%-above-inflation monthly hike to end the subsidy within 6 years.
Come to think of it, wouldn’t you end up with massive lines at every gas station on the 29th and 30th of every month?
Adolf, do read Setty’s comment below. The first step in this process absolutely has to be education. Look at Bolivia for a recent example of what can happen when you simply force the change upon the people.
Think of this like a 12-step program, where the addiction is to the fuel subsidy. What’s the first step? Recognizing that you have a problem. Of course, step two – belief in the higher power, which in this case is the government – will be somewhat problematic.
Yeah, but its fine to subsidize the gas because tourist revenues are piling in!!!!!!!!!!
http://www.noticias24.com/actualidad/noticia/209071/fleming-asegura-que-el-turismo-venezolano-ha-crecido-6-este-2011/
There’s statistics, there’s lies and there’s barefaced cheek!
I guess they only want spanish speaking tourists to come.
Since their new official tourism page is only in spanish :P
I guess european, north american and asian money is no good ;)
Adolph – the issues you raise are not all that complicated to deal with. Colombia, Chile and Brazil have all gone from places that subsidize fuel to places where fuel taxes subsidize the state. The political science of it is available. The first step is a period in which the public is educated as to the real costs of the fuel. One idea I like is having the gas stations post the real cost of the fuel alongside the subsidized price. Also it would be good for the president or party leaders to point out the obvious — that the biggest beneficiaries of the policy are the Universidad Metropolitana kids who go 4-wheeling on the weekend, not the cab drivers with their ’78 Chevrolets in Ciudad Ojeda. Later, eliminate the subsidies, while offering a limited number of fuel subsidy tickets to mass transit drivers to reduce the price shock. Yes, such tickets will go into the secondary market, but it doesn’t matter — it makes it possible to not raise transit fares, which was the real cause of the caracazo, not fuel prices.
Regardless, there will be shocks, and the current economy is poorly designed to deal with them. Higher food shipment costs don’t cause higher domestic production when farmers are worried about expropriation. Higher fuel prices don’t cause people to shift to more fuel-efficient cars when there are no cars to buy. Nor do people shift to bikes when most people don’t even have bikes, and cultural norms (especially against sweat) forbid biking to work. People can’t move closer to work and school when there is a huge housing deficit.
“……..it makes it possible to not raise transit fares, which was the real cause of the caracazo, not fuel prices.”
No, the raise in prices was the fuse that lit the enormous triqui traqui that Thugo and his merry men had armed and primed.
How much could a gas raise alter not only the State’s income but its projected expenditures? (Or, rather, how could a price hike alter the cost of the things government need to buy to fulfill its budgeted plans?
Good post Q, just a quick clarification. Although the opportunity cost of selling those barrels abroad is certainly the economic cost of the policy, without taking in to account production costs, and knowing the exact composition of those 700K b/day internal consumption (remember there are also fuel oil consumed by the petrochemical and electric sector, with different prices), the number you ended up with is not equivalent to the wealth transfer from the public sector to the beneficiaries and, formally, is not the amount of the subsidy. The amount of the subsidy is the difference between the selling price and the production costs. The wealth transfers to the rich are times higher than the subsidy.
Thanks Omar, but that’s too much shorthand for me. It raises more questions than answers, questions such as:
1-Can you explain in a little more detail why a subsidy is defined with reference to production costs?
2-And the difference between “wealth transfer to the rich” and “subsidy”?
3-Would the chart be more technically correct if instead of “Implicit Gas Subsidy” it read “Revenue Foregone due to Gas Subsidy”?
I’ve been struggling with these concepts for a few weeks.
(Also, any chance we can draft you into Enlace Venezuela’s little budgetting exercise?! We’re in testicle-exfoliation mode with the parafiscal spending stuff.)
All that headace to calculate how much subsidy to give out?! Add the opportunity costs of your exfoliation cost and time to the advantages of going unconditional with 100% of natural resource revenues! Implementing conditions requires committee processing, not just at the beginning. It becomes an endless maintenance cost and political battle. Because after you decide the amount, you have to start fighting over about the proportion of allocation to each of the other items, instead of letting each person spend using the personally prioritized proportions that each person already knows, and that, when their priorities change, they don’t have to wait for parliamentary discussions to approve proportions that won’t be personally prioritized anyway.
That time and effort better spent elsewhere. Go unconditional.
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define: exfoliation. The only kind I’m familiar with is that related to ‘el cutis’.
Perhaps you should think in terms of peeling……
The thing is that the formal notion of a subsidy is a transfer (in form of a good or service or cash) from the public sector (PS) to the households. The amount of the subsidy is the difference between the cost of acquiring the good and the selling price. Think of school uniforms, the PS buy uniforms and give them away for free, well in this case the market price of those uniforms are the reference for calculating the subsidy. In the case of gas, the cost of acquiring the stuff is just the production cost, since it happens to be a SP who also produces the stuff. The trouble here is that there is not real reference of a market price of gas in the internal market, since is a good produced and sold in a pure monopolistic way by the SP, we know from Micro what’s the optimal price for a monopoly, but it does not have to do with opportunity costs. Of course the cost of the policy for the SP is times higher (and so does the welfare transfer for the beneficiaries) because of what you already pointed out about forgone revenue. Welfare analysis has to take into account the opportunity cost, but strictly from a BUDGETARY point of view, the accounting of the subsidy is the difference between production costs and selling price, this is the real impact on the budget, and also is the only figure fully comparable with the other items in your original chart, since is what the PS is “investing” in the venture of making the 4×4 Fun Races really cheap
For the record, implicit subsidy is a good way to call it. My point is that we have to separate the “fiscal” subsidy, from the welfare transfer..
Good, that way I don’t have to re-do the image!
Wait wait wait, I’m trying to wrap my head around this… You are exfoliating your balls? Do you have problems with your pores? Nuts aren’t breathing well? Dude, seriously picture this exercise in your mind and tell me it doesn’t cause massive intestinal busting laughter.
Let’s remember that inflation depends a lot on expectations, and people would stock up gas, which is not only dangerous but costly to the nation, that would mean that even with increasing prices, you will have extra demand, do to mostly speculative demand, which in short and medium run can become more costly than the current subsidy. It would become a sort of giffen good, but for other reasons. So price increases should maybe increase mediumly drastic and for non-predictable reasons(sort of arbitrary).
There are also many other societal costs, such as increased traffic congestion, which puts a real drag on the economy, increased pollution and sedenterism, with their associated medical and quality of life costs, etc.
I live in Bogota, Colombia, and here they’ve been steadily reducing the gasoline subsidy, even though it was already much smaller than Venezuela’s.
One thing I’ll never forget about Venezuela was all those street merchants with their personal gasoline-powered generators, generating noise and pollution and little benefit to society.
500.000 barrels of oil per day times 365 days times $70 equals 12.8 billion. Where do you get 81.5 billion from? 12.8 billion is outrageous enough!
1-we’re using bolivars at the official exchange rate, not USD
2-we’re using the current wholesale price of gas in the US as a reference price
3-we’re guessing 600K internal consumption a day.
ps: it’s an *estimate* – it could be much higher (if you use the green lettuce dollar, for instance) or considerably lower (if you use estimated production cost as the reference price.) One way or another, it’s Crazytown Heights out there…
Sorry. I forgot some are still trying to make some sense out of the bolívar. So 81.5 divided by let’s say around 6 and adjusted for your 100.000 additional barrels puts me in about the same range.
Crazy!!! In fact a economic crime against human rights.
I have not had time to introduce the “demanda” before OAS and that I spoke of doing in December 2009… but I will soon and if anyone of you wants to sign up as petitioner you are welcomed to join me.
1. Article 31 of OAS charter amended by the Protocol of Buenos Aires commits the countries to “to dedicate every effort to achieve the following basic goals: — b) Equitable distribution of national income; c) Adequate and equitable systems of taxation;
2. Article 26. of the American Convention if Human Rights (Pacto San Jose) states: The States Parties undertake to adopt measures, both internally and through international cooperation, especially those of an economic and technical nature, with a view to achieving progressively, by legislation or other appropriate means, the full realization of the rights implicit in the economic, social, educational, scientific, and cultural standards set forth in the Charter of the Organization of American States as amended by the Protocol of Buenos Aires.
3. And the Inter-American Court of Human Rights in the proceedings of “Discharged and Retired Employees of the Comptroller”) v. Perú in 2009 declared that it was competent to decide on matters related to the previous Article 26.
It’s even crazier than that.
Considering 600.000 barrels of oil per day, times 365 days per year, and 27.000.000 persons owning those barrels, we get that each Venezuelan is being “taxed” 8.1 barrels per year. That translates to the richest Venezuelan being taxed the same 8 barrels that the poorest Venezuelan is being taxed!
It gets worse. Since PDVSA is owned by all Venezuelans, and each of the goods produced by PDVSA gets sold at a profit that belongs to all Venezuelans, any use of those profits are also a form of equal taxation fee for all Venezuelans. Again, the richest Venezuelan is foregoing the same amount of those profits as the poorest Venezuelan.
Percentually, they are both very regressive taxations because the amounts represents a negligible percent of the rich person’s total capital, but it represents 100% of the poorest person’s capital.
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It gets even crazier than that when you also include the subsidies paid out through access to foreign exchange at preferential rates and which mostly benefit those accessing foreign exchange, not normally the poor.
How does Chavez get away with sending oil to Cuba while rationing it at home?
I still don’t totally grasp why gasoline is the ultimate populist giveaway, replacing the ancient times’ bread and circuses. It certainly seems to me that things like eggs, milk, lightbulbs, shoes, etc would be of much more immediate importance to the masses.
Mike