Caracas Chronicles

How bad is the problem with economic illiteracy in Venezuela? It’s bad enough that even people whose whole job it is to write about the Venezuelan economy for one of our “quality” papers fail to understand the bare basics, such as the concept of opportunity cost.

In El Universal today, Ernesto J. Tovar writes about new research to quantify the losses from PDVSA’s gasoline subsidy. His headline number? PDVSA lost US$2.197 billion since 2005 to underpriced gas.

Now if you’re conversant with the debate and have some notion of the magnitudes it involves, that number will look immediately suspicious to you.

The opportunity cost of the gas subsidy has been variously estimated of around $10-$15 billion per year – far far larger than the $2.197 billion in seven years reported here. (In fact, some estimates go as high as $26 billion per year.) Even Elías Jaua concedes the subsidy cost the government US$2.56 bn in 2011 alone – something is clearly screwy with that US$2.197 bn over seven years figure.

Look closer and it’s easy to see where the difference springs from: the piece in El Universal touches not the opportunity cost of the subsidy, but the accounting cost – the actual cost of gasoline production and distribution, minus the revenue from selling it at current prices.

Now, most economists would argue that this kind of accounting cost is not the most relevant metric – the real cost of the subsidy is the amount of money you forego from international markets in order to keep gas so cheap. There might be some specific instances where the accounting cost is more relevant – for instance, from an internal PDVSA accounts perspective – but treating the accounting cost as the cost is clearly nonsense.

The original article in Centro Gumilla’s SIC magazine by UCV Economist Luis Oliveros and Universidad de Carabobo’s Domingo Sifontes (not available online, alas) explicitly goes through the arguments on each side. In fact, that’s largely what their article is about: Oliveros and Sifontes calculate the Opportunity Cost in 2011 at 4% of GDP ($11.834 billion), while the accounting subsidy is just 0.2% ($750 million), then discuss the way Iran is phasing out gasoline subsidies as a model of where we go from here.

Clearly, there’s a valuable and interesting debate to be established on the relevant benchmark for the subsidy, with pros and cons both for the accounting and the opportunity-cost measure of the subsidy’s cost…but that’s not a debate you can have with Ernesto J. Tovar, because even though he cashes a check on the 15 y último each month specifically to write about economics, he doesn’t seem to know it exists. The guy is an Opportunity Cost virgin…

Deep, deep sigh.

And then another sigh…

Listen, I understand that normal people don’t really get these concepts. They’re not difficult, but they’re unfamiliar, and that’s fine. But we’re talking about reporters specializing in the topic, coño, how can it be that articles like this wind up in the newspaper and nobody says a thing!?