Monday, December 27, 2010

Bolivia raises fuel prices and there's trouble in store

Pretty big economic news out of Bolivia over the Christmas weekend, as the government of Evo Morales (with Veep Garcia Linera in charge while Evo visits Venezuelan flood victims) has bitten the bullet and slashed the government subsidies on vehicle fuel prices. Here's how Reuters covers the story:

LA PAZ, Bolivia, Dec 26 (Reuters) - Bolivia's leftist government raised fuel prices on Sunday by as much as 83 percent to foster oil production and cut state subsidies, in a politically tricky move that set off a transportation strike.
To offset the measure's impact, the government also froze public utility rates and said it will promote wage increases that top the 6 percent inflation estimated for this year.
In 2006 Bolivia's socialist leader Evo Morales nationalized the energy industry, which is centered on natural gas exports.
"We are bringing fuels up to international price levels ... State subsidies cost $380 million a year. We don't want this to continue. We buy expensive diesel fuel and sell it cheap," said Vice President Alvaro Garcia, who is standing in for Morales during the president's visit to Venezuela.
"We had to raise prices so energy producers feel the need and incentive to produce (oil), so there will be more diesel and gasoline and we will import less ... in one, two or three years, we won't have to import any gasoline or diesel at all," Garcia said.
Diesel prices will rise CONTINUES HERE
As for prices, these charts show you the before and after of the subsidy cut and in three different dosages (for ease of comprehension). First in litres... in standard gallons (4.546l)

...and here in US Gallons (3.785l)

Be clear, this is a big move by the Morales government and the strike they knew they'd generate as a result isn't one that will roll over and die in a couple of days. This government isn't one that just makes a big decision like this one on the spur of the moment, either, so there's clearly strategic thought gone into the timing of this move (one thing that springs to mind is that tourist and citizen transport is greater than business/economic freighting and shipping over the Christmas/New Year period).

Economically speaking, it does make sense on a few levels. Firstly, Bolivia is a net exporter of natgas but produces little liquid hydrocarbons itself and is a net importer of diesel, gasolines etc. The subsidy that was being paid by the government was a clear net loser for the treasury. Also, the country runs on public transport (private car ownership is low), a medium that can absorb a huge percentage increase more easily. Thirdly, this subsidy cut, somewhat strangely, does appeal to the Socialist leanings of the Morales administration because a fuel subsidy is in effect a subsidy for those who can afford a car etc (the same 'tax break for the rich' argument is often used as a critique of Venezuela's heavily discounted fuel).

So this is a story that's worth watching in the next few days, a real test of the authoritive power of the Morales admin and one that will bring out transportists on a strike that may get ugly. Maybe a negotiation and semi-rollback of the subsidy is the eventual outcome? I don't know, but watch this space. 

UPDATE: An example of US analytical mediocrity: Of all the quotes on this issue that "academic" Greg Weeks could have chosen, he goes for the one that makes himself look like a total dumbass. A better example of total non-comprehension of South America would be difficult to come by.