Venezuela: Land of 12-Cent Gas

Global oil prices zoomed up to $135 a barrel this past week. But that doesn't worry Roberto Morales, a 33-year-old Venezuelan businessman. Morales, who drives a compact Volkswagen Gol, still pays only $1.32 to fill up his car with 11 gallons of high-octane gasoline, thanks to Venezuela's subsidized fuel price.

"This is crazy but I'm not complaining," says Morales. "Gasoline here is cheaper than water."

He's not exaggerating. Gasoline prices in Venezuela are the cheapest in the world—1/15 the price of a liter of bottled water, and 1/25 the price of a liter of milk. Since 1998, Venezuela has kept the price of gas fixed at 0.097 strong bolivars a liter, or about U.S. 3¢ (lower octane is 0.070 strong bolivars). That means that consumers pay about 12¢ a gallon, or 1/33 of what their U.S. counterparts pay.

What It Costs

It's no surprise that President Hugo Chávez, who regularly excoriates Western consumers for their wastefulness, has had a hard time preaching to his supporters about energy conservation or alternative fuels. Gasoline consumption at home has risen steadily over the last decade and is now about 320,000 barrels a day, or about 14% of the country's current oil output of 2.3 million barrels a day. And thousands of barrels are lost daily through illicit gasoline exports to neighboring Colombia, Brazil, and Trinidad and Tobago. Still, oil consumption per capita is far lower in Venezuela than in the U.S.: about 23 barrels per day per 1,000 people vs. 69 in the U.S., according to NationMaster.com.

But Venezuela is paying a price for cheap gasoline. State oil company Petróleos de Venezuela is footing an $11 billion a year bill for underwriting and subsidizing the fuel. That's nearly double its 2007 net income of $6.27 billion. The cost of that subsidy, along with money it pays to underwrite government social programs, has forced Petróleos de Venezuela to borrow billions on international markets to cover investments.

"As domestic consumption and international prices increase, the price of keeping that subsidy in place is also rising," says Patrick Esteruelas, an analyst with New York-based Eurasia Group, which provides political risk analysis. "But the government is reluctant to raise gasoline prices now, especially at such a politically critical time."

A Political Hot Potato

Venezuelans go to the polls in November to elect state governors and mayors. Chávez is unwilling to take unpopular measures, especially as his approval rating has plummeted by more than 20 percentage points since 2006. The Venezuelan president is also still smarting from voter rejection last year of his proposal to rewrite the constitution, which would have given him more power. "His numbers are just beginning to stabilize now at between the low 40s and mid-40s in opinion polls," says Esteruelas. "For Chávez, this isn't the time to take any chances."

Petróleos de Venezuela is already facing problems meeting domestic demand, especially in the face of repeated accidents and shutdowns at its four domestic refineries. Programmed expansions at two of those facilities have been pushed back because of funding delays.

Venezuela is not the only country that spares its citizens from high oil prices through fuel subsidies. For oil-producing nations, subsidies are a way of sharing the natural-resources largesse with the population. Iran and Saudi Arabia rank as the second- and third-cheapest places to buy gas, at the equivalent of 40¢ and 44¢ a gallon, according to a survey by Associates for International Research. Both nations offer their citizens gasoline subsidies, though they are not quite as generous as Venezuela's.

But as prices rise, the pressure to pare back payments can be intense.

Students hit the streets in Indonesia recently as that nation dropped some of its subsidy and raised the price of gas by about 30%, from $1.80 per gallon to $2.50. The increases are expected to filter through to higher costs of food and public transportation.

Raising Prices: A Tough Sell

In Venezuela, cheap gas is considered more a right than a privilege. Several governments, including that of Chávez, have attempted to raise prices in the past. Those moves have often been met by riots and demonstrations, forcing successive presidents to back down. Hundreds, if not thousands, died in riots in 1989 when the government of former President Carlos Andrés Pérez was reported to be considering a gasoline price increase that would have also raised public transportation costs. Faced with mounting bloodshed, Perez quickly backed down.

"There is a perception in Venezuela that raising fuel prices leads to political instability," says Alberto Quirós, who formerly headed Royal Dutch Shell's (RDS) operations in the country and is now an independent oil analyst.

The last time a Venezuelan leader successfully raised gas prices was in 1998, when then-President Rafael Caldera also ended Petróleos de Venezuela's monopoly on domestic gasoline sales. Foreign companies, which were promised that the country would eventually end fixed gasoline prices, rushed in, hoping to capitalize on growing demand. But when Chávez took office in 1999, those promises were forgotten. Many of the companies that invested in stations, including Shell and ExxonMobil (XOM), subsequently wrote off their investments and left.

In the years since, prices of most other goods have risen dramatically—consumer prices in general are up fivefold since 1998—and the Venezuelan minimum wage has kept pace. The widening gap with gas prices has forced many gas station operators to shut down.

Chávez has grudgingly admitted that a problem exists. In early 2007, he ordered Energy & Oil Minister Rafael Ramírez to study the impacts of a possible increase in gasoline prices. Public criticism led to the proposal being quietly dropped.

That's a relief to consumers—one of the few available in a land of high inflation. "I know that these prices won't last forever," says Morales. "But while they do, I am going to take advantage of them."

For more on international gas prices, see BusinessWeek.com's slide show.