Hugo Chávez challenges Venezuelan 'birthright' to cheap gas

In Venezuela, Humberto Patadilla pays just under $1 for 21 gallons of gasoline. If Hugo Chávez raises gas prices, he says, it could 'cause an explosion against him.'

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    A worker counts change at a filling station in Caracas. Consumers can pay about 5 cents
    a gallon, thanks to longstanding state subsidies that carry an increasing cost to the national economy.
    View Caption

Venezuelans have endured blackouts, water rationing, and skyrocketing inflation. But ask them to pay more than $1 to fill up their gas tanks and you could be inciting revolution.

"Absurd!" says Humberto Patadilla, a 60-year-old mechanic, at the thought of paying more. To many in Venezuela, which has the largest petroleum reserves in the Western Hemisphere, cheap gasoline is a birthright.

"There's more than enough gasoline. [President Hugo Chávez] is giving it away to the rest of the world, why raise the price here?" Mr. Patadilla says as he pays just under $1 to top off an old, beat-up Mercedes with 21 gallons of gasoline.

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Vehement in his disdain toward the president, Patadilla finds one potential benefit to higher gasoline prices: It could unify this ideologically polarized nation "and cause an explosion against him."

And for that very reason, analysts say, President Chávez won't cut the gas subsidy for now, despite its costing the government at least $1.5 billion annually at a time of increasing financial strains. Potential for populist backlash is too great to risk before a 2012 presidential election, reflecting the balancing act leaders face worldwide between rising gas prices and voter discontent.

While Chávez now appears focused on efforts to mediate a peace deal for Libya's ongoing civil conflict, he took on the oil subsidy recently when he lectured Venezuelans that cheap gas can't last.

"Every time you fill up your gasoline tank, you're filling it up with the cheapest in the world; and the government is subsidizing over 90 percent of what it really costs," Chávez said in a television address. "We must begin to reduce gasoline consumption."

Gas subsidy encourages waste

Successive governments have unsuccessfully grappled over how to raise prices, sometimes to disastrous effect. An unexpected gasoline price increase in 1989 set off a week of deadly rioting. Nor is the problem isolated to Venezuela. Last December, Bolivia's Evo Morales reversed a decree raising gasoline prices after his leftist base went on a rampage. The same month, Iran deployed riot police to gas stations when Mahmoud Ahmadinejad slashed the gas subsidy, nearly quadrupling prices.

After local media seized on Chávez's remarks, officials quickly quashed the idea of price hikes, blaming the opposition for spreading misinformation.

"Where did the opposition get [the idea] that we're going to ration gasoline or raise the price?" Oil Minister Rafael Ramirez later said during an address to the National Assembly. The government is requesting a more "rational use" of energy resources, not rationing, said Mr. Ramirez.

If the minister was implying that current use is irrational, at least some locals agree. "We drive around a lot and practically throw [gasoline] away," Maria Eugenia Mored says as a gas station attendant pumps 11 gallons into her Jeep Cherokee for about 50 cents. "The streets are always packed."

Such waste leads to reduced oil export revenues, hampering the ability of state oil company Petroleos de Venezuela (PDVSA) to invest in production and forcing the company to occasionally purchase gas from other nations, an extraordinary situation that some critics liken to Saudi Arabia importing sand.

Subsidy cost $9 billion in 2010

Unrest in the Middle East has pushed up oil prices, which will boost Venezuela's oil revenues, but analysts say several factors could yet force Chávez's hand.

Exports of refined oil products have fallen to almost 100,000 barrels a day from 379,000 b.b.d. in 1997, in part brought on by poor maintenance and months-long work stoppages. Because of this, between 2009 and 2010, Venezuela imported millions of barrels of gasoline and blending components, buying as high as $60 a barrel on the international market to supply domestic demand, where gasoline was sold at the equivalent of $12 a barrel, says Gustavo Coronel, a former PDVSA board member and critic of Chávez's oil policies.

"They cannot afford to go on like this any longer," he says. Were PDVSA to sell all oil at real prices, says Barclay's analyst Alejandro Grisanti, the government would have seen an additional $9 billion in revenue last year, representing 4.5 percent of gross domestic product. Instead, this was one of the few Latin American economies to contract in 2010.

PDVSA regularly issues billions of dollars' worth of debt, but is struggling to meet obligations as Chávez has redefined the company's mandate to not only produce and refine oil but also distribute food, support social missions, and sell discounted petroleum to friends. London-based Capital Economics recently warned of "a growing risk that the government will default on its obligations in 2012."

"Even with oil prices approaching the $100-per-barrel mark, PDVSA continues to face a very challenging financial situation," says Juan Pablo Fuentes, a Venezuelan economist at Moody's Analytics. "This is due in part to the huge gasoline subsidy ... [but also] includes a bloated payroll, increasing transfers to the central government, declining exports, and increasing capital costs."

All this might point toward austerity. Instead, with elections next year, Chávez is expected to ramp up spending. Still, observers agree, if anyone can convince Venezuelans to forgo the world's cheapest gas and simply accept cheap gas, it's Chávez.

"President Chávez knows that the subsidy represents an immense burden," says Mr. Fuentes. "This time around he seems more determined to do something about it, however."

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