Pumping for joy

Drillbits have stopped spinning across most of Latin America these days, and oil revenue for the region´s big producers has tanked. That has some beleaguered governments seeking respite at the fuel pump.

Mexico is accelerating the opening of the retail fuel market, allowing suppliers other than state-owned Pemex to import gasoline and diesel starting in April this year rather than January 2017 as originally planned. Why the rush? A comprehensive energy reform, never popular with Mexicans nurtured on resource nationalism, has lost some traction amid budget cuts and layoffs. By advancing the market opening, the government hopes to spark the first tangible benefits of the reform through cheaper fuel prices and infrastructure investment, not to mention the feel-good factor for voters. Industry is worried about regulatory lags.

In Venezuela, the government this month increased gasoline prices for the first time in almost two decades, introducing a meaningful differential that is nudging drivers to consume more 91-octane gasoline over 95-octane that is more expensive for struggling state-owned PdV to produce. Venezuela is still effectively giving gasoline away, so cross-border smuggling will persist and PdV will continue to lose money. But the company might not need as much imported gasoline and components if more drivers switch to the lower quality fuel.

For most Venezuelans, the pump price hike is not as relevant as it was in 1989 when hundreds died in riots sparked by a price adjustment. The myth that another hike would incite a second deadly ‘Caracazo’ was broken, not because Venezuelans accept the rationale behind the increase, but because these days they are too preoccupied trying to find food to care about it.

In Brazil and Argentina, drivers are accustomed to fuel price distortions. Brazilian state-controlled Petrobras was allowed to keep gasoline prices above market levels for much of 2015, pocketing the difference after years of money-losing subsidies. Many Brazilian drivers are now resorting to cheaper hydrous ethanol instead, even if the price differential isn´t currently enough to make up for the efficiency loss. In Argentina, the government is allowing refiners to import crude to offset the cost impact of artificially high domestic crude prices, a subsidy that producers say they need to stay afloat, but which is politically impossible to pass through to Argentinian drivers at a time of stubbornly high inflation.

In oil importing Chile, pump prices haven´t come down in nearly the proportion that global prices have, as the government tries to recoup the tax revenue it routinely lost to keep retail prices from spiking when oil was north of $100/bl. Drivers are skeptical that the government isn´t just exploiting the pump to pad its shrinking coffers.

Latin American governments may be obtaining short-term benefits from erratic retail fuel pricing and taxation driven by revenue gaps and political expedience. But places like Argentina and Venezuela reveal longer term risks such as runaway demand, shortages, trade imbalances and slap-dash regulation with fiscal, environmental and safety implications. It´s tough for governments to adopt regulatory transparency and prioritize downstream investment when the nozzle is so easy to manipulate.

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