Socialism in Venezuela: Why is gasoline so cheap? 9510 gallons of gasoline for $ 1 !!!
I will start this publication giving some concise data ...
In Venezuela you can buy 9510 gallons of gasoline for 1 US dollar, but the average monthly salary in Venezuela is US $ 6 before taxes and discounts. A citizen can buy approximately 4kg of pasta (spaghetti) with the same amount of money that he would buy 57060 gallons of gasoline.
These low prices are the result of the subsidy that the government has on the sale price. How does it work? Well, the Venezuelan state oil company, PDVSA, is in charge of distributing gasoline to the fillings stations where it is sold to the citizens, later the owners of the fillings stations are in charge of transferring an invoice to PDVSA, so that PDVSA ultimately pays to fillings stations for commercial margin concepts, in this way citizens can buy gasoline at a ridiculously cheap price and the owners of fillings stations receive profits for lending their facilities to distribute the fuel, and all this is possible thanks to the fact that Venezuela's subsoil contains the largest oil reserves in the world.
For decades the system has been practically the same, Venezuelans have been paying virtually nothing for fuel, the only time a politician tried to raise the price of gasoline was ending the decade of the eighties, and did not end well, protests and repression broke out in the streets of Caracas, capital of Venezuela, however, the socialist government of Venezuela decided to raise the price of gasoline 6,000% in the midst of the current crisis that the country suffers, but even so it remained the gasoline most cheap of the world.
As I said, the fuel subsidy system remained in operation for decades without any problems, however, at present, the government has had to limit the sale of gasoline to 9.24 gallons per automobile and 1.32 gallons per motorcycle in several states of the country.
Message from a Venezuelan about the situation of gasoline:
In order to better appreciate the abysmal subsidy that exists on the price of gasoline in Venezuela, we will put in context that the price of gasoline in the United States, which is between a range of 2.25 to 2.85 dollars per gallon , and in Norway, for example, the price of gasoline is approximately $ 2 per gallon.
Sources: @TruthForce y @Scandinavianlife.
In the United States you can buy 9510 gallons of gasoline for approximately $ 23,775, while in Norway you can buy for 19,020. Interesting is to understand that in the middle of the crisis that Venezuela currently suffers, citizens could acquire for a single dollar, that same amount of gasoline. That level of economic distortion can only be found in countries where the market is totally subordinated to the power of a State.
Many analysts and economists tend to say that it is necessary to eliminate the gasoline subsidy in order to stabilize the national economy and thus open prices in the market, as well as greatly reduce the current deficit of PDVSA and the government, however , I think they are forgetting the first and maximum problem of eliminating the gasoline subsidy, and that is that there is no way to establish a correct price if there is a monopoly, because a market that does not have the information provided by the price system and the competition lacks the power of self-regulation.
So what can a nation do in these circumstances?
Having gasoline at low prices is not a bad thing per se, however, selling gasoline at a price artificially lower than the operating cost is a big problem, because it generates a deficit that has to be paid by someone, in this case, the cost is assumed by the oil company, but when inflation increases and the price of the gasoline remains frozen, it is inevitable that the deficit will increase, which will end up leading to indebtedness and later to bankruptcy. If the company goes bankrupt, everyone runs out of gasoline, and it would be irrational if there are resources, machinery and qualified people to produce, distribute and sell the product, simply because the State wishes to arbitrarily maintain an artificial price, with the objective of subsidizing a class of "privileged" people, after all, not all citizens have to fill a tank.
The only possible solution is to eliminate the monopoly and allow different companies to compete with each other, with the aim that the price systems can work properly, and that consumers can benefit from the product to the extent estimated by supply and demand . Some of you may wonder how to eliminate a monopoly, well, there is only one way, and that is to remove the privileges established by the State.
Conclusion
In Venezuela the cost to fill the gas tank is extremely low, however, everything that citizens stop paying directly, end up paying indirectly much more expensive (My grandfather used to say: "cheap is expensive"). Tens of thousands of millions of dollars are constantly looted from the nation, since low costs favor the smuggling of gasoline, in addition, by not having a price system, you can not honestly establish the price of a product, under the commercial logic in this scenario the monopolist company would abuse its power and exploit the market for its own benefit, however, being this a state company, decides to do the exact opposite, and continue the process to the detriment of the production system. In conclusion, the only way for an economy to function in a healthy way is through competition and the free market, any way of exercising central control over economic factors will inevitably lead to failure. In this case, low-cost gasoline translates as a misuse of non-renewable natural resources.
Thanks for sharing this analysis. Every news coming out of Venezuela makes me wondering how long this country can carry on like that. All the best for the people of Venezuela!
What do you think then of the Pedro? Looks like fake coin.
Well, it seems that it will stay like that for a while longer. I think the Petro is a scam, I've written about it in previous publications, the Petro is basically a debt instrument, not a cryptocurrency.
thank you for sharing these facts about Venezuela in English... I think the problems of this country are still too silent in Europe...
Thank you! Yes, I try to share some things from my country, but only those that can provide some kind of useful knowledge to other people, such as, for example, the price system or that socialism sucks. Thanks for comment.
that shit is crazy. They could calculate their cost of production and distribution of gasoline and peg the price to that but that would take someone willing to do that. The best way is through free markets and competition.
The problem is that inflation is constantly rising, and if they raise the price of gasoline at a very high rate, it could have political repercussions for them.
I hope something does soon.
Very interesting article. For a state owned company, it would make sense to simply sell at 10% above production costs. The problem with that would be that they'd simply increase the costs and pay their management (=buerocracy+government) more and waste money for stupid infrastructure projects to buy votes and then raise prices. At least that's what they do in Germany in the public sector.
A partial solution might be to make it a law to decrease the price peg by ~0.5% to account for productivity gains. But that'll never happen..
Establishing an oligopoly would not need more than breaking up the monopoly into 4-5 different companies. Ideally, you turn them into stock companies and give every household a share of one of them. The downside of this (and generally the market solution) might be that the prices go up. Oil and especially the refinery needs technology, which means you end up with a natural oligopoly structure and that tends to offer prices above the theoretic equilibrium. The counter balance to the price increase would be then that every family gets the money back via dividends from their share - minus the government tax of course, but maybe the dividends could be made tax-free (yeah, I laughed too about that thought^^).
A rational argument for tax exemption could be to allow foreign investment into the sector (for better technology+more capital). The rule could be to tax the profits with maybe 20% when they leave the country, 10% when the profits stay, but are in the hands of foreign investors and 0% for domestic owners.
I think, a government that does what's right would do it this way... lol
In Germany btw these 10,000 gallons cost you about 50,000 Euro at the gas station. If you send me them here, I will send you a brand new Mercedes back ;-)
Correct, a very good analysis that you do, but as I said, the company worked relatively well in the past, the current problem is that since there is a lot of inflation but since prices remain frozen, the subsidy is increasing.
Something that I did not mention, was that even though the company subsidizes all this, it still obtains very high income, so most of the profits that are received for the exports of oil, gas, and all its derivatives, are used for all those things you described, such as "stupid infrastructure to buy votes and then raise prices" projects and other direct subsidies.
Years ago, before the monopoly was formed, in Venezuela there were many oil companies 12 or 15 of them, then the monopoly was not necessary, the price of gasoline was low, of course not as much as now, but people could afford it. But I think that as long as it continues to be a monopoly, you can never find a real market price.
A new Mercedes? It does not sound like a bad idea.
Good post politics @vieira