No longer just about opportunity cost (Updated)

Special delivery for Mr. Chávez. Mr. Hugo Chávez.

“We shouldn’t have to pay market prices for gasoline, we’re an oil-producing country.”

We’ve all heard the above argument. We all know it makes no sense. Still, it’s not an easy one to bring down.

Understanding why this is nonsense requires having some notion of opportunity costs. It requires understanding that when you give away something you could be selling for a high price, it’s the same thing as giving money away.

However, we no longer need to rely on the concept of opportunity cost to make the case for ending the gasoline subsidy.

Bloomberg’s Nathan Crooks and Paul Burkhardt are reporting that Venezuela has increased its imports of refined products … from the US. Because of decreased investment in refining capacity, increased corruption (an example of which Gustavo Coronel and Setty nicely deconstruct) and a surge in domestic consumption, we now import 40,000 barrels per day of refined products from the good’ol US of A.

The money quote:

“Venezuela has the cheapest and most subsidized gasoline prices in the world, with a gallon costing the equivalent of 9 U.S. cents. It pays about $200 a barrel for gasoline it imports at current market prices and sells it domestically for about $5, said a former PDVSA official who asked not to be identified because he isn’t authorized to speak publicly about the issue.”

Simple math folks: (200 – 5) dollars * 40,000 barrels * 365 days = $2.847 billion per year.

This isn’t money we’re leaving on the table. It’s not earnings we failed to make. This is coming out of our pockets. It’s hard, cold cash we are paying the gringos. And it’s just a drop in the bucket, a mere fraction of the amount of fuel Venezuelans consume each day.

$2.8 billion to pay for the fuel needs of, say, Puerto La Cruz. How many schools does that build? How many hospitals?

UPDATE: Setty helpfully points us to a place where we can track of these things. It even has a historical graph. Fun!

37 thoughts on “No longer just about opportunity cost (Updated)

  1. Chavez will have no comment if asked why Venezuela is buying petroleum products at world prices from the imperialist U.S. Chavez will just buy more Chinese tanks, Russian submarines and jets, and import more SUVs that need even more fuel from the U.S.

    $2.8 billion/23 million people = $122 per Venezuelan spent on importing petrol products. Just amazing.


  2. OK, but if Chavez is defeated, we’ll go from increasing social spending to an immediate plateau and inevitable decreases.

    So Pto. La Cruz is better off even until domestic refining capacity is expanded.


    • The problem therein lies with “until domestic refining capacity is expanded”. Given the historical trend of disinvestment and complete lack of real spending on it as taken from PDVSA’s own financial statements, refining capacity is the La Carlota of the oil industry in Venezuela. This includes simple expansion to support domestic demand due to expanding population which isn’t happening.

      In the meantime, you essentially pay rent on the forthcoming expansion of refining capacity to the tune of $122 per person per year–including those who don’t even use oil individually. This is the condition for the forseeable future (and the cost will only increase with the passage of time) and should be wholly untenable for the populace if they were to ever truly realize the gravity of the problem.


  3. Good post. About the first quote “We shouldn’t have to pay market prices for gasoline, we’re an oil-producing country””, I normally point out that we shouldn’t have to pay as much as non oil producing countries, but because of lower transportation costs, not because of subsidies. In other words, we shouldn’t be paying global market prices, but definitely *local* market prices.

    From your post it’s clear we’re paying global prices as a group, which simply translates into the richest being subsidized and the poorest paying for something they don’t get to use. Very sad.


    • I mentioned something of the sort a while ago on this same blog, but there is more to it. There is a big contradiction in a Socialist government that subsidizes fuel, something that mainly benefits the rich, and by the rich I mean everybody with the means to buy a car and then get gas basically for free. The poor ride the Metro and surface public transportation, and you could always make a point of keeping some kind of subsidies for that, at least while you ease the transition or improve the system. As for cargo transportation, done almost exclusively by truck on our dear beloved country, the fact remains that the truck companies are horribly inefficient, so much that -even with the benefit of free gas- they campaigned several years ago against the free transportation agreement with Colombia because then Colombian truckers -that pay much higher prices for gas in their own country and have a much worse road network- would steal business from them. And don’t even get me started on the fact that ALL of the Venezuelan democratic governments badly neglected the railroad system in Venezuela so that we effectively have no cargo railroads in the country. Railroads are still relevant for development, look at the United States and Europe.


      • I think you haven’t got your facts right. The Venezuelan railroad system was neglected by the people. Governments just followed suit.

        You see, when trucks first showed up in Venezuela, it meant many new jobs in the cargo business, let alone the beginning of the infatuation of the populace with the nice American automobiles and buses. People stopped using trains as a means of transport and Col. Delgado Chalbaud tried to exclusively use them as cargo, starting with the Caracas-La Guaira railroad, but truck drivers boycotted the attempt for populist reasons. Then tragedy struck: the 1951 Vargas mudslides, which basically meant the end of the train in Caracas. Incidentally, that was a great incentive to build the Caracas-La Guaira freeway, which is known to have happened some time later.

        However, I don’t blame the generation of my grandparents. They just didn’t know better.


    • Unfortunately, of Arturo’s 6.2 million cars on the road in Venezuela (in the post below), very few are of anyone a developed country would call “rich”, so there is really very little oil price subsidy of the rich by the poor in Venezuela.


      • Well, it may not be obvious but, since the oil belongs to all Venezuelans, out of every 30 million barrels sold, one is coming from the poorest Venezuelan and one from the richest. This translates to a 100% oil tax rate for the poorest and almost 0% oil tax rate for the richest. This implies that any spending with money derived from oil sales is similarly regressive. This means that any good or service payed for by the government with oil money that in any way benefits the richer Venezuelans is heavily subsidized by the poorer Venezuelans.

        They don’t have to be considered rich by anyone else for the regressive subsidy of the relatively rich to be understood.


  4. Interesting information..its not a surprise that Venezuela is importing refined products today, what is a surprise is that it happened before..what happened in 93-94 that trigger imports of refined products?


  5. Four questions – how much gasoline does Venezuela use per day – in barrels? There are approximately 6.2 million vehicles on the road in Venezuela. How many barrels of gasoline are refined product from the refineries in Venezuela? What is the source of the information that states that 40,000 barrels/day are imported from US? Could it be that 40,000 barrels of crude are swapped for 40,000 barrels of gasoline? And if, as one commentator asks, the refined products come from Venezuelan refineries in the US, there must be transfer pricing. So your math means zippo and is just another vomit bowl of propaganda. What is the source of this information about 40,000 barrels of gasoline being imported per day since I never have and never will believe one word written by Coronel. The man is obsessively sick.


    • 1.- Venezuela uses about 700,000 barrels of oil per day. Some of that goes in the form of gas, some other in the form of diesel, some in the form of other products.

      2.- The link is posted

      3.-Unlikely as 1 barrel of oil doesn’t yield 1 barrel of gasoline.

      4.- They could come from venezuelan refineries. The purpose of those was to place venezuelan products in the US market and it made sense to ship oil and not a finalized product (IMHO). Remember that even though the refineries are Venezuelan they still employ US and not Venezuelan citizens plus they pay hefty taxes in the US and not in Venezuela. And all these is if the hypothesis of that the oil is coming from venezuelan refineries is true.


      • How much gasoline does one barrel of oil yield?

        I didn’t know, so I looked it up. I found too many answers to the question. Apparently, the answers can vary from 5% to 100%, depending on the source of the oil (Venezuelan is the worst) and how much technology is used in the refining process.

        The article below seemed to have pretty good explanations that were accessible to a layman.


      • Thanks for the information. Sp in effect – if the Bloomberg figures are true than Venezuela imports 5.7% of the gasoline it consumes per day. And if it comes from Venezuelan refineries in the US that is OK (it doesn’t metter who works there. The refineries belong to PDVSA and so they are Venezuelan.). If it does not, then that is Ok as well as 5.7% sound smuch less than 40,000 barrels per day.

        BTW – did you see how PDVSA has soared in the Fortune ranking of the world’s biggest companies by 30 places to number 36 from number 66 in 2011? What a great company we have! Congratulations to Rafael Ramirez and his socialist work force!


        • “Yo Ho Heave Ho, Yo Ho Heave Ho,” Let’s all stop for the moment, “For To The March We Gotta Go…” (The Song Of The PDVSA Boatmen).


    • This is why you Venezuelans need us Chinese to help you out. It is lucky Chavez has us to help him or your revolution would already be a failure if people like you are the ones leading it! It doesn’t matter whether the refined product is bartered for Venezuelan crude oil, sold for gold bars or Chinese Yuan, the point is Venezuela is taking a valuable product and selling it for nothing. That is a lot of lost income.

      Your way of thinking is like a man finding a gold nugget in his yard, and throwing in the trash can with the logic that it wasn’t worth anything anyway since he did not pay anything for it.

      Greetings from China.


      • Maybe “our” Revolution should fail… It is no part of me and I don’t want it, and so think many others in Venezuela. We need XXIst. Century Socialism as much as China needed Communism. For nothing at all.

        We can do without it and without mortgaging our country part-wise to the oppressive dictatorship that governs your country, forcing everybody there in China to pretend that it’s their Revolution, no matter if they are killed by it. (ah collectivism!).

        Indeed you state it correctly. Chavez is a huge sucker, but Venezuelans who follow him are even bigger suckers. The smart Chinese are just following the Venezuelan adage: Every day a sucker goes out to the street, find him and keep him. Hugo Chavez in the international arena.


      • Let me see if I got this right, Fenqing1979.
        You posit we should be helped by a country that
        A: Is receiving oil from us at sub market pricing because our “leader” borrowed tons of money from it. Money that at over $100 a barrel we should not have borrowed in the first place had the economy been managed differently.

        B: Half of those same loans are in a non convertible currency, meaning that we are obligated to spend the money on your sub par products such as poison food, lead based toys and articles heavily influenced by intellectual property theft.

        The only sane point you make is that Venezuela sells a lot of valuable product for nothing to the likes of Cuba and the Caricom countries.

        As far as I’m concerned, taking help from the Chinese is just as bad, or worse, than depending on other major players such as the US.

        We will learn to stand on our own two feet eventually.


  6. This does not mean that Venezuela is “in Net” a gasoline importer – that is, that it imports more gasoline than that it exports. Am I right?

    Don’t get me wrong. I mean, the upward trend is still pretty effed up, but it’s not such a new phenomenon. Sacrificing Falcón’s exports to maintain the subsidy in Guayana would be pretty much the same – just less noticeable.

    Which leads me to suspect that there might be a glimpse of a technical explanation for the increase in imports as opposed to a reduction of exports to be redirected to the internal market… Maybe it’s actually more expensive to mobilize the gasoline within the country? A mean to sustain export markets in place? Any thoughts?


    • My thought is about quality. I ignore what types of refined products is Venezuela producing these days. It might be so that the government is saving some cash by producing high quality gas, selling it, and buying low quality gas for the internal market as a mean to save money.

      In Uruguay is hard to find uruguyan meats and more likely to find brazilian. This, of course, is regulated by the market values.

      I know for instance that Venezuela has built some ethanol refining facilities in order to produce cheaper (lower quality) fuel for internal use to mix in a 10:1 proportion with gasoline.


  7. 1. Someone called Arturo says:
    “your math means zippo and is just another vomit bowl of propaganda. What is the source of this information about 40,000 barrels of gasoline being imported per day since I never have and never will believe one word written by Coronel. The man is obsessively sick”.
    Arturo refers to Venezuelan imports of gasoline and diesel from the U.S. He says this is a product of my imagination since I am “obsessively sick”.
    I want to put him at ease. I am not sick. I am just not Arturo-lazy and take the time to look into things when I want to be informed. I transcribe below a few of the links where he can read (or someone can read for him) the situation of oil product imports into Venezuela for the last two years or so. Are they also “obsessively sick”? REUTERS Jose Suarez Nuñez Damián Prat Informe de Andrés Rojas Jimenez, El Nacional


    • Don’t get too worked up about Arturo Gustavo he often makes statements 100% contrary to the facts because the truth contradicts his beliefs.

      He recently asked on this forum for someone to prove that Chavez had broken the constitution. When the proof was presented he disappeared & never commented on it further.

      So, he has a history of just being stupid – a typical Chavista. He will now say that your sources are tainted because they have an agenda against Chavez & Venezuela.

      Arturo, the facts & the truth hurts.


    • Arturo is our resident chavista troll who presents grade A manipulation material for those promoting cults of personality. His adulation of a certain substitute Daddy is so obsessive that Arturo actually waits for Chávez to sing, whenever the latter makes a long-winded speech.

      I would pay no mind to what Arturo has to say on this blog, where we offer him charitable respite, as well as therapy, obviously to no avail.


  8. I did not know about Arturo. I won’t pay attention in the future.
    Further to the gasoline imports this is what EFE says today (Noticiero Digital):
    Estados Unidos aumenta sus ventas de combustibles a Venezuela


    Washington, 11 jul (EFE).- Después de un hiato de más de siete años en sus ventas de gasolina a Venezuela, Estados Unidos ha incrementado en el último año sus exportaciones de productos derivados del petróleo a ese país, según el Departamento de Energía.


  9. Certainly Venezuela loses LOTS of money by giving away gasoline/oil for essentially nothing.

    Thing is, I looked at Radonski’s web site and didn’t see this issue ever mentioned, but maybe I missed it. Has he made it part of his campaign to cut down on this opportunity cost be raising fuel prices in Venezuela? Has he spoken about it?
    If not, it looks like this is a problem that no-one proposes to do anything about.


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