Bolivia Has Latin America’s Cheapest Fuel, But Subsidies Blamed for Contraband

Government fuel subsidies are unwise, according to experts, who argue they cause corruption, contraband and inefficient energy use

Gasolina
August 17, 2022 | 01:45 PM

La Paz — For more than 15 years, Bolivians have had one of the cheapest fuel prices in Latin America, and where a liter of high-octane gasoline currently costs 3.74 Bolivian pesos ($0.54) and diesel 3.72 pesos ($0.54).

A cubic meter of vehicle natural gas costs 1.66 Bolivian pesos ($0.24 US cents), while a cylinder of LPG costs 22.5 pesos ($3.27), and the population spends between 10 and 12 pesos ($1.60) per month on household gas.

According to figures from the country’s statistics bureau INE, fuel imports in Bolivia increased by 143% in the first six months of this year compared to the same period of 2021, with gasoline and diesel imports costing the government $1.77 billion during the period, compared to $729 million in the first half of 2021.

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According to the Economy Ministry, keeping fuel prices frozen is a state policy, and which reduces the risk of a wave of inflation since the energy sector is the driver of economic development. The administration of President Luis Arce considers that “subsidizing the price of fuels in the domestic market is the policy with the greatest positive impact for Bolivian families”.

The consequences of fuel subsidies

However, according to a study published in May by ESD, subsidies generate a short-term benefit for the poorest segments of society, but have negative consequences on the fiscal deficit, investment, economic growth and environmental impacts, and which has generated a discussion on the impact of such subsidies.

The authors of the study look at the relationship between fuel price subsidies and political and economic variables and observe that more corrupt societies tend to have higher subsidies, while more democratic political systems have higher prices, and that when political power is concentrated within a small few, subsidies tend to increase.

According to other studies such as one by El-Katiri & Fattouh in 2015, fuel price distortion results in fewer efforts toward environmental conservation, fuel smuggling, adulteration and resale on the black market.

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Such practices take place in Bolivia, which has the 16th cheapest diesel prices in the world, and the third most accessible in Latin America, which has given rise to a diesel smuggling market from Bolivia to Brazil, where the fuel is the third-most expensive in the region.

The same is happening on the border with Argentina and Peru, where fuel smuggling is believed to have increased.

According to the president of the association of economists of Tarija, Fernando Romero, Bolivia’s borders are porous and the increase in fuel prices in neighboring countries will increase fuel smuggling.

According to Bolivia’s government, since April the 34 gas stations located on the country’s borders are being guarded by 600 military troops.

Defense Minister Edmundo Novillo acknowledged the problem and said that “as a country, as a state, there is an urgent need to prevent the smuggling of our products, such as gasoline and diesel, abroad, to our neighboring countries”.

But this is not a new problem, and since 2018 the Bolivian army has been leading the fight against fuel smuggling as part of its so-called ‘sovereignty plan’.

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According to a study carried out in Saudi Arabia by Alduyan & Gasim and published in 2021, subsidies can greatly increase consumption or demand for fuel and incentivize inefficient energy use, and which also leads to low government investment in energy efficiency.

Another problem highlighted by experts is that a fuel subsidy seeks to help the poorest families, but in reality it is upper middle-income families who benefit the most.

Bolivia has gas, but no oil, reserves, which is why it must import diesel and other fuels. The government of former president Evo Morales tried unsuccessfully to remove fuel subsidies in 2010, but which caused a serious crisis and social unrest, with Morales maintaining the subsidy as a result.

In January, a government decree established the reduction of tariffs to 0% for the import of crude oil, and which allowed state energy company Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) to define the volumes of crude oil to be imported based on the needs of the domestic market and the processing capacity of the country’s refineries, in a bid to guarantee fuel supplies.

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At a regional level

Russia’s invasion of Ukraine has caused a sharp increase in fuel prices throughout Latin America this year, with the exception of Bolivia.

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“Contrary to what happened in neighboring countries, Bolivia kept fuel prices fixed, within the framework of a policy instructed by President Luis Arce to provide certainty and tranquility and move towards the economic reactivation of the Bolivian people,” according to a Hydrocarbon and Energy Ministry statement.

In contrast, in Argentina, diesel prices increased by 54%, with a similar hike in Brazil, while in Chile they increased by 79% and in Peru by 95%, and in the case of high-octane gasoline, the price increase in Argentina was 59%, in Brazil and Chile it was above 100%, and in Peru 98%.

The Latin American countries with the highest fuel prices are Chile and Brazil, while the lowest are in Bolivia and Argentina. However, Bolivia has one of the highest ratios of gasoline prices as a percentage of monthly per capita GDP.

According to the ESD study, “in absolute terms the price is low but in relative terms it ends up being high. On the other hand, Chile, despite having high prices, is the country with the lowest indicator, because the size of its GDP is relatively larger compared with the rest of the region’s countries”.

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