Thursday, June 19, 2008
Oil Subsidy, The LATAM Experience
We have been so preoccupied with the drastic cutbacks in fuel price subsidy, we haven't paid sufficient attention to what's happening in other countries. Let's have a look at some countries in Latam, some are net oil exporters, some are net importers, some subsidise, some don't. Their report card tells quite a story.
Let's look at those a bit like Malaysia, namely Argentina and Colombia. Both are small net exporters of oil, around 300,000 barrels a day. The public in Argentina and Colombia pay US$1.04/l (RM3.38) and US$1.10/l (RM3.57) respectively. Both countries still subsidise fuel products for the people. Argentina spent US$11bn a year and is grappling with an inflation rate of 9%. While Colombia spends around US$3bn a year, and they have a more manageable inflation rate of 6.3%.
Big exporters include Mexico and Venezuela. They export some 1.4m barrels a day and 2m barrels a day respectively. Naturally fuel price is heavily subsidised and cheap. The public in Mexico and Venezuela pay US$0.69/l (RM2.24) and US$0.04/l (RM0.13). Boy, don't we all want to live and work in Venezuela??!!
Mexico's subsidies total US$19bn, while Venezuela's total subsidies were US$11bn. Of course Venezuela's population is almost the same as Malaysia at 26m, while Mexico's population is nearly 110m. Hence you need to divide the subsidy with the population to get at a realistic figure.
However, the good news ends there for Venezuela because they are currently struggling big time with inflation at 32% while Mexico is chugging along nicely with inflation at just a tad below 5%. Draw your own conclusions.
Let's now look at the net oil importers, Brazil and Chile. Brazil imports 30,000 barrels a day while Chile imports 244,000 barrels a day. Brazil has NO subsidy, while Chile's subsidy is a mere US$311m. Naturally fuel price for the public there is high. Brazilians pay US$1.58/l (RM5.13) while Chileans pay US$1.35/l (RM4.38). Brazil's inflation is at a manageable 5.5% while Chile's at 8.9%.
It maybe premature to draw solid conclusions from the Latam countries' experience but seemingly the countries that practice lesser fuel product subsidies do better over the longer term. It probably has to do with working in proper competitiveness in the industrial structure of the economy when you do not have oil subsidy. I guess, in a way, you can call it the curse of having oil. If you have it, you have to do a lot better with it as it can mask inefficiency. If you don't have oil, you are already competing at international standards of efficiency, you'd probably try harder already.
p/s photos: Jennylyn Mercado