Venezuela Inaugurates New Fuel System, Increases Local Production

Mérida, June 1, 2020 (venezuelanalysis.com) – Long queues were reported at Venezuela’s gas stations on Monday as a new fuel distribution and pricing regime came into effect.

Government officials hope the policy will stabilise the market and end shortages, while reducing the burden of public subsidies on sanctioned state-run oil firm PDVSA.

Under the new system, Venezuelans are able to purchase up to 120 litres of gasoline or diesel a month for vehicles, or 60 litres for motorbikes, at a subsidised price of 5,000 Bolivars (BsS) per litre (US $0.025). To qualify, customers must have registered their vehicle in the government’s Patria website, entitling them to visit fuel stations one day a week according to their registration plate, for the first thirty days. 1,368 of the country’s 1,568 fuel stations have been designated to supply fuel at this price, which is 75 percent subsidised by the state.

In addition to the subsidised quota, customers have the option of purchasing an unlimited amount of fuel at a “premium” price of US $0.50 (98,000 BsS), payable in US cash dollars for the first time ever, or at the floating equivalent in Bolivars or Petros. The country’s 200 remaining stations have been “authorised” to charge the dollarised rate as well as independently import fuel, effectively breaking the 50-year-long state monopoly on gasoline supply.

To limit the inflationary impact of the price hike, public transport and freight vehicles will continue to benefit from a near-complete state subsidy until September, with one litre costing less than US $0.0001.

Unveiling the measures on Saturday, President Nicolas Maduro contextualised the new prices, comparing the cost of an average subsidised 40-litre tank to that of a canned soft drink.He also said that the move was the “first step” in a generalised implementation of “international fuel prices” in the country, considered to be between US $0.50 and $1.

Successive Venezuelan governments have maintained a long-standing policy of heavily subsidising fuel since a price hike and sweeping austerity package sparked a popular uprising in 1989, known as the Caracazo. Prices were, however, marginally raised in 1996 and 2016 as inflation rendered them inoperable.

It is estimated that the subsidies cost Venezuela US $12 billion a year, as well as a further US $18 billion in extractive fuel smuggling incentivised by the huge price disparities with neighbouring countries. In Colombia, for example, a litre of gasoline can be sold for around US $0.60.

Reaction to the shakeup in the fuel market has been mixed. While most commentators agree that the price increase was a “necessary measure,” many have pointed to disparities with the current minimum wage, which was raised to 400,000 BsS (US $2 or 80 litres of subsidised fuel at the time of writing) last month. Others have criticised the continued use of blanket subsidies, arguing that targeted subsidies based on income brackets would be more effective and avoid creating new avenues for corruption.

The implementation of the new system follows the arrival of five Iranian tankers carrying 1.5 million barrels of gasoline, estimated to supply Venezuela for 50 days at current consumption levels, as well as 300,000 barrels of diluents required for local fuel production.

The Caribbean country has faced severe fuel shortages since the Trump administration imposed a crushing oil embargo as well as a blanket ban on dealings with Venezuelan state entities in 2019.

In recent months, Washington sanctioned two subsidiaries of Rosneft, forcing the Russian energy giant to transfer its operations to an unnamed state firm. Rosneft had been carrying up to 60 percent of Venezuela’s crude output, partly in exchange for diesel and gasoline.

The embargo has also largely blocked the import of vital diluents and spare parts needed to reactivate the country’s refining capacity, which, in addition to existing problems in the industry, effectively crippled domestic gasoline production.

However, Venezuela’s fuel output is beginning to rebound with Iranian and Chinese technical assistance. Reuters reported last week that domestic crude processing nearly doubled in May but remains well below installed capacity, covering roughly half of the estimated pre-lockdown internal fuel demand of 230,000 bpd.

Edited by Lucas Koerner from Santiago de Chile.