Cost borne by environment and the poor as government remains wedded to subsidy

There is a world where oil costs $100 a barrel, where motorists wince as they fill up the tank and where energy efficiency is a mantra. And then there is Venezuela.

At a Caracas petrol station last week, Gloria Padron, a paediatrician, ticked off items that would cost about the same as the 60 litres of fuel gurgling into her Land Cruiser. "Let me think. A Magnum ice cream. A cup of coffee. A cheese and ham arepa [sandwich]. Small stuff like that. Can't say I've ever really thought about the price. Why would you?"

When a litre costs 0.7p, and filling the tank of a 4x4 costs 42p, it is a fair question. Petrol is so cheap here - reputedly the cheapest in the world - as to be almost free. Even under the artificially overvalued official exchange rate, petrol is 45 times cheaper than in Britain.

So while oil-importing nations appeal for relief (George Bush called in vain this week on Saudi Arabia to increase its output so as to bear down on prices), major exporters such as Venezuela bask in their immunity from the petroinflationary pain. Venezuela has the seventh-largest oil reserves in the world, and petrol is lavishly subsidised.

"If it gives us nothing else, at least the government lets us have our own petrol this cheap," said Padron, 44, revving her engine. "It may be crazy and have no logic, but I'm not complaining. Nobody is."

That is the problem. The subsidy warps the economy, drains government coffers, rips off the poor, pollutes the air and paralyses cities with traffic jams. Yet it is hugely popular and the government dares not end the insanity. The phenomenon is common to oil producers such as Burma, Indonesia, Iran and Nigeria: their people feel cheap petrol is a birthright and tend to revolt if the price rises.

The era of $100 barrels has magnified the distortion, because governments are obliged to forfeit windfall revenues to divert ever-greater quantities of oil to domestic markets. "It is difficult to go from this system to something more rational," said Mark Weisbrot, an economist with the Washington-based Centre for Economic and Policy Research. "People think they know how cheap the oil is, and that it is theirs. It is very deep in the culture."

Venezuela, a major oil producer which introduced the subsidy as a populist measure in the 1940s, is probably the most extreme case of a gas-guzzling dream becoming a policy nightmare. A lack of rigs and other problems has reduced the output of the state oil company, Petróleos de Venezuela, just as domestic consumption has soared to 780,000 barrels a day. The subsidy costs the government around £4.5bn annually. It also encourages a brisk trade in contraband petrol across the Colombian border, where prices are higher.

A consumer boom has doubled the number of cars on Venezuela's roads, with 500,000 sold last year alone. "None of the advertisements talk about fuel efficiency," said Daniel Guerra, the manager of a Ferrari dealership in Caracas. "People have been spoiled for so long with the subsidy that when it comes time for a reality check they don't understand."

As a result, streets are filled with new SUVs, including Humvees, as well as wheezing 70s-era sedans, aggravating smog and gridlock. Some economists call the subsidy "Hood Robin", because it steals from the poor and gives to the rich by favouring relatively wealthy car owners above the poor who rely on public transport.

President Hugo Chávez railed against it last year, going so far as to label the inequity "disgusting". He also chided western countries for consuming so much oil and depleting a non-renewable resource. The self-styled revolutionary socialist, however, has not followed through on his promise to raise prices at home.

"That might make economic sense, but could risk his already dwindling support," said Michael Shifter, an analyst with the Inter-American Dialogue thinktank. "In a context of growing fissures within his own coalition, it is doubtful Chávez would be too eager to reduce gas subsidies," he said.

When a previous government raised prices in 1989, the resulting riots left hundreds, possibly thousands, dead and destabilised the political system. A price rise now could worsen the galloping 22% rate of inflation by having a knock-on effect on the cost of haulage and public transport. The opposition would also pounce on the move and try to use it against the president in forthcoming regional elections.

Chávez's extensive oil diplomacy, which subsidises exports to friendly countries, notably Cuba, has further sensitised Venezuelans to prices at the pump. "You can't give a stranger a present of something from your own home and then deny it to your children," said Alfredo Lozano, 55, a decorator, as he filled his 4x4. "The government has to keep the price low."

In exchange for advice about transport and waste management, London receives a discount valued at £15m a year on oil for its buses, but the deal, signed by Chávez and the London mayor Ken Livingstone, has not signposted a way out of the subsidy trap.

On a visit to Caracas last year the British capital's transport commissioner, Peter Hendy, said he would not tell his hosts to raise petrol prices. Calls to his office last week to see if that was still the case were not returned.
Cheaper by the gallon

A number of oil-producing countries have tried to wean their people off subsidised petrol, only to confront a furious response.

Nigeria used to be among the cheapest places on the planet to fill your car, with a litre going for just 0.3p in 1990. These prices fuelled a massive smuggling industry. A decade later it had reached 8p a litre, one of the factors in big protests against the government.

In Burma, a 67% hike in the cost of a litre of petrol to about 22p last August also helped set off anti-government demonstrations. Petrol is rationed, with private car owners restricted to buying two gallons a day, or falling back on the much pricier black market.

In Iran, prices of 5p a litre and a lack of refining capacity combined to create shortages. Rather than introducing steep price rises, the government opted for rationing. But the result was the same: motorists went on the rampage, setting fire to petrol stations. Another byproduct of rationing (100 litres a month for ordinary motorists) was a flourishing black market, where prices have soared close to 30p a litre.

(By Rory Carroll, The Guardian, 18/01/2008)