Energy Economy

2 Cent Gas in Venezuela

Depending on who is counting, based on currency exchange rates, whether gasoline is priced by liter or gallon, the price of a gallon of gas is about two cents in Venezuela. That compares to a U.S. average price per gallon of regular of $1.70.

The two-cent gas is the product of the government’s subsidy of prices. The Venezuelan central government believed the price, which has been in place for years, would help keep a restless population happy and, perhaps, more prosperous. Based on political tension within Venezuela, the plan no longer works, if it ever did.

The irony of the low price of gas in Venezuela is that low oil prices have crippled its economy. In theory, Venezuela’s massive crude reserves, which are the largest in the world, larger even than in Saudi Arabia, should bolster the Venezuelan treasury. Oil prices that have dropped to $30 a barrel have undermined that. And Venezuela’s production infrastructure is fairly inefficient, due in part to the fact that it has kicked out most major oil companies. Exxon Mobil Corp. (NYSE: XOM) recently won a judgment of $1.6 billion for assets seized by the government in 2007. These “majors” lead the world in exploration and production skill. Gone are the days when Venezuela could rely on their expertise.

The price of gas may not stay among the lowest in the world. Venezuela has lost its ability to help its citizens by keeping driving cheap. It is possible that cheap gas prices could surge soon. Venezuela’s government needs revenue, although a jump in gas prices would be too little to offset what has become a disaster.

According to the Financial Times:

With the price of oil, the country’s (Venezuela’s) lifeblood, tumbling to lows not seen in more than a decade, analysts are warning that the embattled government of Nicolás Maduro will struggle to pay its debts, fund its imports and service its foreign bonds this year.

Markets have been increasingly pricing in the possibility of a default, with prices for many of its bonds due after this year trading at between 32 cents to 37 cents on the dollar — a level considered distressed. Meanwhile, the cost of insuring Venezuelan government bonds and debt issued by state-owned oil company PDVSA are surging once again.

Low gas prices may not be a large enough piece of the economy to make much difference, but two-cent gas is among the litany of things that have not helped either.