CHAVEZ PLAYS POLITICAL CRAPS WITH PROPOSALS TO

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000354 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD, DOE/EIA FOR MCLINE HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR RJARPE COMMERCE FOR 4431/MAC/WH/JLAO NSC FOR RKING E.O. 12958: DECL: 01/29/2019 TAGS: EPET EINV ENRG ECON VE SUBJECT: CHAVEZ PLAYS POLITICAL CRAPS WITH PROPOSALS TO INCREASE GASOLINE PRICES Classified By: Economic Counselor Darnall Steuart, for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY. Facing the global economic crisis and a domestic fiscal crisis arising from low oil prices, Chavez has floated plans to rationalize the subsidized price of gasoline (a $5.5 billion subsidy according to PDVSA,s own calculations). Energy and Petroleum Minister Ramirez has opined that the GBRV could increase the cost of 95 Octane gasoline 247% (from 0.1 to 0.33 Bolivars/liter or $0.18/gallon to $0.58/gallon) and not touch the price of 91 Octane gasoline (roughly $0.12/gallon). Media is already reporting gasoline shortages resulting from the on-going nationalization of downstream operations. But riding high off his February 15 successful bid to end presidential term limits, Chavez might have the political capital to face a domestic political storm if he carries through with the proposal. END SUMMARY. End of the Free Ride - Gasoline Prices to Increase? -------------- -------------- ¶2. (U) During his weekly address to the nation on March 15, President Hugo Chavez announced plans to rationalize the subsidized price of gasoline in Venezuela. He noted that Venezuela "practically gives gasoline away" and has the cheapest gasoline prices in the world (Note: The subsidized price of 91 Octane (unleaded) gasoline is 0.7 Bolivars (Bs)/liter or $0.12/gallon and 0.97 Bs/liter or $0.18/gallon for 95 Octane at the official exchange rate of 2.15 Bs to the USD). Minister for Energy and Petroleum Rafael Ramirez stated that the government might only increase the price of 95 Octane and not that of 91 Octane gasoline. According to Ramirez, the GBRV might increase 95 Octane gasoline to 0.33 Bs/liter (or $0.58/gallon),an increase of 247%. Theoretically, the increased prices would be borne by the rich whose gas-guzzling SUVs consume 95 Octane gasoline and avoid impacting the lower social classes that rely on 91 Octane gasoline. In fact, we assume we would see a significant substitution effect as consumers shift from 95 Octane to 91 Octane gasoline due to the $0.46 subsidy differential. ¶3. (U) A PDVSA report from September 2008 claims Venezuela's domestic consumption of refined petroleum products was 491,000 barrels/day. The same document claims that PDVSA produces 890,000 b/d of gasoline and nafta. In contrast, most local analysts believe that Venezuela's domestic petroleum liquids consumption is between 700,000 and 800,000 barrels/day compared to government estimates that put domestic consumption in 2007 at 564,000 barrels/day (compared to the 560,000 barrels/day estimated by the pre-strike PDVSA in 2002). Observers are skeptical that consumption has remained constant from 2002 while record high crude prices drove GDP (average annual real GDP growth from the beginning of 2002 to the end of 2008 was 4.7%) and consumer demand including car sales. Local observers have also claimed for some time that PDVSA is importing gasoline or gasoline components in order to meet skyrocketing demand. ¶4. (U) PDVSA maintains that the gasoline subsidy costs $5.5 billion dollars annually when you take into account production, refining, and distribution costs. The March "VenEconomy Weekly," a respected local financial analysis report, estimates that PDVSA is importing 100,000 b/d of gasoline at a cost of $70/barrel (for a total of $7 million/day) because the Card"n and El Palito refineries are shut down due to modernization and maintenance activities. "VenEconomy" concludes that taking into consideration the GBRV's subsidy, imported gasoline is sold at a loss of over CARACAS 00000354 002 OF 002 $6.3 million/day, or $2.3 billion/year (not including distribution costs). The Venezuelan crude basket averages $36.75/barrel for 2009, down from its 2008 average of $86.81/barrel. Thus, to pay for every barrel of imported gasoline, the GBRV has to sell at least two barrels of crude. ¶5. (U) Since September 2008, PDVSA has been in the process of nationalizing downstream operations. PDVSA-Deltaven was charged with assuming responsibility for distribution, wholesale, and retail operations. Even though the transition is on-going, local media this week started reporting sporadic gasoline shortages outside of Caracas. History of Gasoline Price Increases -------------- ¶6. (U) President Chavez instructed Minister Ramirez in January 2007 to conduct a feasibility study on the need to raise domestic gasoline prices. Due to negative public reaction to the announcement, Chavez did not revisit the order. The last time gasoline prices were increased was in 1996 (three years before Chavez came to power). In fact, during Chavez's tenure, the only price change was a decrease of 0.05 Bs on 91 Octane gasoline when PDVSA stopped selling the leaded version and introduced an unleaded product in 2005. ¶7. (U) In February 1989, then Venezuelan President Perez announced economic reforms tied to an IMF austerity package that included amongst other measures, a 100% increase in the price of gasoline and a 30% increase in public transportation costs. The economic plan spurred widespread rioting in Caracas known as "El Caracazo." Government attempts to control the rioting led to an estimated death toll of anywhere from 300 to 2,500 people. The same free-market reforms led to two attempted coup attempts in 1992 (including Chavez's own) and the eventual downfall of the Perez government. ¶8. (C) COMMENT: Faced with oil prices below $40/barrel and a resulting fiscal crisis, the government is looking to institute economic reforms to weather the storm. Chavez's opening of this Pandora's box may reflect a belief that he has the political capital to push through this price increase. Assuming there is no substitution effect, based on 2005 estimates of the consumption of 95 Octane, the GBRV will increase revenue by $590 million. If the GBRV raises the price only on 95 Octane, however, we can expect to see a large substitution at the pumps of 95 Octane with 91 Octane gasoline as people decide that $0.12 gallon gasoline is a more reasonable choice than $0.58 gallon gasoline. While it might be politically expedient to target the increase on the rich "esqualidos" with their gas-guzzling SUVs, the same vehicles will run fine on 91 Octane. The resulting shortages of the cheaper gas would affect all gasoline consumers. END COMMENT. CAULFIELD