October 29, 2007
Subsidized Gasoline Prices Eat Into Venezuelan Oil Exports
Venezuelans are buying big cars because their gas is subsidized and cheap.
Motorists in the United States smarting from rising gasoline prices, take note: Mr. Taurisano pays the equivalent of $1.50 to fill his Hummer’s tank. Thanks to a decades-old subsidy that has proven devilishly complex to undo, gasoline in Venezuela costs about 7 cents a gallon compared with an average $2.86 a gallon in the United States.
What do low prices do? They boost consumption of course. The same pattern of lower prices and rising consumption is seen in Iran.
Venezuela is not alone among oil-rich countries grappling with subsidized gasoline. Iran, a close ally, was shaken by unrest in June when its government rationed gasoline, which cost 34 cents a gallon at the time.
Some analysts expect Iran to stop exporting by 2014. Well, Venezuela appears to be on a similar path with very rapidly rising consumption.
Fuel smuggling into neighboring Colombia, where prices are much higher, is also rife. Domestic fuel consumption is up 56 percent in the past five years, to 780,000 barrels a day, said Ramón Espinasa, a former chief economist at Petróleos de Venezuela, the national oil company. One-third of oil production now goes to meet the subsidy, he said.
Perversely, higher world oil prices makes domestic consumption more affordable for oil exporting countries. The money flooding in due to the huge oil price rise raises living standards and gives people more cash for cars and gasoline. So what this lead to? The Export Land Model where oil exporters cease to export. In the Export Land Model the big oil exporters (grouped together in Export Land) have rapidly rising consumption and then when their oil production peaks their exports decline far more rapidly than their oil production. Us residents of Import Land (countries which are net oil importers) then find ourselves in a world of hurt.
The Export Land Model underscores why I believe our future quality of life and living standards hinge on how rapidly battery technology advances. We are headed for a big liquid fuels shortage. We need a substitute for liquid fuels for transportation.
"Some analysts expect Iran to stop exporting by 2014."
This comment was the heart of the matter. But the reason the oil exports of Iran will suffer in a few year is not because of the rising internal consumption, but because the oil fields of Iran are aging. There are some more unexplored oil fields, but by the time they are developed, it will be too late.
And this brings us to why Iran feels that it is forced to build nukes (without extra oil from outside Iran will disintegrate by itself even more than Iraq), for otherwise Iran will not be able to hold on to its newly conquered oil fields in Southern Iraq and Eastern Saudi Arabia after the quick takeover. Saddam had no difficulty taking all the oil fields of Kuwait within a couple of days, but without nukes it was very difficult for him to keep Kuwait.
And since Iran does not have a choice , the US and EU also do not have a choice, only the timing of the choice is the issue now: before or after the elections of 2008?
The "Export Land Model" you linked to makes no sense at all. While oil consumption may be subsidized in some countries, the price of oil is set globally. Your model assumes that oil demand in exporting countries is far less responsive to price (more inelastic) than demand in importing countries. There is no basis for this assumption: in fact if this were the case, subsidizing oil consumption directly would not boost consumption compared to just distributing the additional revenue.
The remark about fuel being smuggled to Colombia is quite indicative in this regard. People have little or no use for the subsidized oil: they prefer to exchange it for other goods, even though they have to break the law to do it!
The other possibility is that countries like Iran and Venezuela go bankrupt and are forced to sell their oil on world markets rater than giving it away to their citizens, thus increasing supplies.
"Guest," at October 30, 2007, 03:20 AM, seems incorrect in applying the widely-accepted principles of human behavior in free markets to the behavior of a tyrant with control over a valuable resource. A tyrant does not have among his aims the maximization of the average wealth of his subjects. His aim is more along the line of keeping himself, his family, and his friends in power. Thus, he seems likely to use some oil to keep his people placated but dependent, with cheap gasoline and other "social services," and to use the rest to enrich himself, his family, and his friends. He will not usually give large sums of money to his subjects, because they need not spend that money to buy gasoline; they may spend some of it on efforts to get rid of him. A law against re-selling oil or gasoline outside the tyrant's territory supports the tyrant's rule by keeping his subjects from enriching themselves and thereby putting themselves in a position to oppose him.
I've treated "Guest" politely, but doing so has required restraint. I despise thoughtless reliance on a simple model of human behavior that excludes most of what we understand, however poorly, about human behavior.
The evidence for the "Export Land Model" is right in front of you.
1) We do not see oil importing states subsidize the price of oil. Quite the opposite. They tax it, sometimes quite heavily.
2) The oil exporting states do subsidize internal consumption by selling oil below the market price. The price in Iran or Venezuela is not set globally.
3) Lower prices do cause higher consumption.
4) The lower prices in exporter states certainly are boosting consumption and quite rapidly in fact.
Prices are rising. So Venezuela can export less and still make more money from oil sales. The higher prices go the less they need to export. The less the producers export the higher the prices will go.
There are limits to how high prices can go. We'll shift to substitutes. But only the substitutes and the total money available to buy energy will limit price rises.
The ELM is a good tool, but it is only partially useful to foresee the future of oil market.
1) Exporters export oil because they want to have the money needed to buy something else from abroad.
2) Importers import oil because they are able to export something else to pay for the oil.
Exporters and importers do this because this make them better off.
Exporters buy with their exports their internal subsides to oil.
So, it is impossible for exporters to stop export and keep the subsides in the same time; they will need to shift the cost burden from oil importers to (EX)exporter's taxpayers to keep the subsides. Given their economical status this is impossible (not in Iran, not in Venezuela, not in Nigeria).
Another point to keep in mind is that oil exporters are importer of other goods like foods, drugs, cars, etc. They need to pay for what they consume. Currently Pakistani annual rice exports stands at two hundred thousand tons and Iran want bigger trade with them. How they pay if they are not able to export oil? With pistachios?
More the oil go up, more the prices of food will go up (corn, maize, sugarcane, soy, etc. used for fuel).
So, less they export more they need to pay for importing goods.
The price of imports into Saudi Arabia have not gone up much compared to the price of the oil they export. They were selling oil for $12 a barrel about 9 years ago. Now they are selling it for over $90 per barrel.
The exporters are not going to reduce internal consumption as fast as they reduce exports. They won't do this for the same reason they currently sell gasoline way below market price. Their internal political pressures prevent them from purely responding to market signals. They are governments, not corporations. Don't expect them to behave like corporations. If you do you will mispredict what will they do.
Counterpoint: China is an importer which subsidizes the price of petroleum. So is Nepal.