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Invest in people, not fuel tanks

Monday, November 2, 2015

The world’s cheapest fuel and foreign currency shortage combine to make Venezuela a living museum for classic American cars, rivaling Cuba. Venezuelan vehicles are from a different era than the pre-revolutionary cars cruising around Havana—they are more 1970s and 1980s. 

Many of them are beat up and in need of obvious maintenance. I’m talking about maintenance issues like doors that don’t have locks. Instead, they are kept shut with a string. I came to think of them as coffins on wheels. 

The irony is that while foreign exchange restrictions mean that only the well connected Venezuelans can afford to buy new cars, nearly nowhere else in the world can one find the money to drive these V8-powered gas guzzlers. 

In Venezuela though, gasoline is free. That’s right, free. It doesn’t cost anything. One liter of gasoline costs Bs 0.07. At the black market currency price of 650 Bolivars to one US dollar, that is 0.0001 per liter. If you round that off, it adds up to nothing. 

Like with any product, if you don’t give it value, it will be wasted. That is just Human Behaviour 101. Rather than invest in new and fuel-efficient (with airbags!) vehicles, cheap fuel directs consumer behaviour towards driving the biggest vehicle possible. 

The economic result is that buying a new vehicle is all hypothetical because the country has gone bust trying to pay for the subsidy, which was estimated to cost about US$50 billion in revenue and lost foreign exchange earnings before oil and gas prices took a nosedive.

Venezuela is an extreme example but in T&T fuel subsidies consumed TT$19 billion between 2011 and 2015. That money could have been used to pull the poor out of poverty. Poverty reduction is always mentioned as the reason for fuel subsidies but the evidence is that they cause more harm than good. 

Subsidies start as an attempt to shield citizens from inflation and price hikes. Those are noble intentions but the road to failure is paved with good intentions. Subsidised fuel is a failed policy. It consumes huge amounts of government budget; distorts the economy and steals from investments in more productive spending such as education and health. 

Cheap fuel means more climate-changing CO2 emissions and more people killed by air pollution. Subsidising fuel reduces investments in renewable energy and mass transport. Poverty is eradicated by investing in people, a good business environment and infrastructure. Filling up cheap at the fuel pump does not add to productivity. 

To add insult to injury fuel subsidies benefit the rich more than the poor. There is actually a transfer of wealth from the poorest to the wealthy. It is a reverse Robin Hood policy. So why do countries like Venezuela and T&T continue to follow this policy? Maintaining fuel subsidies is a political decision, not an economic one. 

Politicians know that reducing fuel subsidies means immediate pain for citizens. If poorly planned a subsidy removal can result in a shock effect, primarily a shock to popularity but in extreme cases in civil unrest. The doublesnomics that increased the price of a doubles by $1 had nothing to do with the fuel component in the price of a doubles. That is miniscule. But it reinforces the fact that a lot of what drives consumer behaviour is non-rational and emotive. 

Citizens must trust that a smooth transition is planned. The best way to create this trust is to start implementing traffic solutions immediately. Is T&T ready to make a break with fuel subsidies? Finance Minister Colm Imbert has put it on the agenda. I urge him to make use of present low energy prices to abandon the fuel subsidy on gasoline within this government term. 

Minister Imbert says that a mass transit solution will cost between $10-$15 billion. The fuel subsidy can pay for that within 10-11 years. Mass transit can only work when commuters have an economic incentive to use it. It cannot coexist with subsidised fuel.

There is no time like now. At present oil prices, premium gasoline will be cheaper if the market price is charged. Super and diesel will go up to somewhere between $4 and $5. 

Some will be hurt by even a $1 per day increase in the cost of living. When oil prices were high their taxpayer’s dollars fuelled the vehicles of the middle class and the down-the-islands boats of the wealthy. Fuel smugglers became instant millionaires. A system of targeted welfare will benefit them. Maybe a travel card that can also be used in maxi taxis or increased spending on social services, health and education. That is what the poorest need. 

Fuel subsidies increase inequality and do not make the poor richer. Invest in people, not fuel tanks. 


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