Short Of Price Hikes, Venezuela Struggles To Limit Fuel Use

UPDATE: Short Of Price Hikes, Venezuela Struggles To Limit Fuel Use

CARACAS (Dow Jones)--Pressure is mounting on the Venezuelan government to find ways to cut domestic fuel consumption in the South American country, but short of raising prices, options seem fairly limited.

As the hydrocarbons-rich nation tries to manage its strained finances and make sure it has steady oil supplies for export, it is looking to limit the amount of fuel that gets used at home. President Hugo Chavez is now making clear that cutting fuel subsidies amounting to nearly 90% of production costs is being considered.

Yet if leaving the subsidies in place is fiscally risky for a country that ran a fiscal deficit of 4% of gross domestic product last year, cutting them is politically perilous.

The subsidies alone cost Venezuela more than $1.5 billion a year, Oil Minister Rafael Ramirez admitted over the weekend. Economists say the opportunity cost of maintaining them is several times greater.

Local development bank Corporacion Andina de Fomento, or CAF, estimates that Venezuela would have $9 billion more at its disposal per annum if it had market-determined prices such as those in the U.S. or even in neighboring Colombia. Instead, Venezuelans have long been able to fill their tanks for a little more than 10 cents a gallon, a gigantic incentive to consume rather than conserve fuel, or at least use it efficiently.

"It doesn't matter if you're a Chavista, or an anti-Chavista, or even someone who doesn't care about politics, know this: every time you fill a tank of gasoline, you're pouring the cheapest gasoline in the world," Chavez told his audience during the latest episode of his weekly show "Hello, President!"

"Raising prices is the only solution for them," said Evanan Romero, former Venezuelan deputy minister of energy and a former board member of state-run oil monopoly Petroleos de Venezuela, or PDVSA.

But doing so could be a costly political move for Chavez, who is relying on support from the country's poor in the run up to next year's presidential elections. Also, the Venezuelan government has been cautious of raising fuel prices since the removal of gas subsidies in 1989 resulted in bloody protests and riots in Caracas, marring the presidency of Carlos Andres Perez.

Aside from saying that they aim to reduce consumption, officials have given few clues as to how they intend to meet that goal.

Ramirez, who also serves as head of PDVSA, addresses the National Assembly Thursday, and may announce some measure aimed at lowering consumption. Earlier this month, PDVSA announced that it planned to reduce domestic usage by around 100,000 barrels a day in 2011, but didn't detail how.

Drought-induced power shortages last year caused the amount of fuel being used for electricity production to spike, bringing total amount of fuel consumption in Venezuela to around 600,000 barrels a day, according to PDVSA.

But energy sector analysts say the total number may be more than 700,000 barrels a day. Of that total, which includes diesel and gasoline, more than 300,000 barrels per day is gasoline.

Venezuelan economist Orlando Ochoa said in a recent opinion piece that the Oil Ministry's aim to cut consumption is an admission that the country is not producing as much oil as it claims.

Indeed, Venezuela's production numbers have been challenged by the Organization of Petroleum Exporting Countries and the International Energy Agency, both of which claim the country produces less than it says it does. PDVSA says it is producing near its OPEC quota of 3 million barrels a day while IEA put January production at 2.21 million.

Economists and oil analysts have speculated on various ways for the government to reduce fuel consumption. Some say the government may just look for ways to ration fuel consumption by setting limits on purchases.

Economists at CAF also say the government may look at ways to steer consumers toward using 91-octane gasoline, rather than 95-octane, which would help reduce refining and distribution costs.

Both measures, however, seem more like temporary patches rather than long-term solutions.

Setting limits on purchasing "is only going to create a black market for petroleum," said Romero, who now works as an energy consultant.

"Whatever the government chooses to do, they're just setting the scenario for a price increase," he added.

-By Kejal Vyas, Dow Jones Newswires; 58-414-249-6821; kejal.vyas@xxxxxxxxxxxx

http://online.wsj.com/article/BT-CO-20110216-717764.html
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