Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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Subsidies "Two are gone, more arrive"

One of the most beloved comics in South America is Condorito, the character was created by the brilliant Pepo, mind of remarkable skills, born in Chile, country where I have great memories from my student days. Condorito used to have several secondary funny characters as a crocodile out of the window, a painting where the sea "falls" to the living room, and a graffiti of a hanged man with the words "muera el Roto Quezada" [died Roto Quezada], that were the delight of us all.

One of the most famous secondary jokes was the hotel "Dos se van, tres llegan" [2 are gone, but 3 will arrive] telling us about the hotel quality, when two persons left... three arrived. Of course a dynamic consistency exercise tells us about how unstable this situation is, since the hotel capacity is limited. However, the lyrical figure is completely valid and more than one recalls this anecdote with a smile.

Unfortunately, explosive situations like the hotel "Dos se van, tres llegan ", in real life are a headache, one of them is the relationship between the international oil prices and the diesel oil subsidies, let me tell you why.

For many people, Bolivia is a lucky country because of its natural resources abundance. In the past, they were the silver and tin, now it is the natural gas. We are very comfortable selling grandma's jewels and buying food with it, worked good in the past and it seems work better in the future. Therefore, natural gas sales to Brazil (agreed, yes... I will mention again, in the nineties) currently generates juicy fiscal revenues; but the news in the oil sector are not so good, given the insufficient Bolivian production, the country has to import huge volumes of diesel oil , more than 60% of internal demand.

So our situation is sui generis¸ a lot of fiscal revenues from the natural gas export taxes, but on the other hand, we spend a bunch of dollars with subsidy diesel oil imports. In this sense, the question is clear: at the end, do we win or do we lose when the oil price increases? We win, because we get more taxes from the natural gas exports, but we lose because the diesel oil imports with a subsidy internal price.

Ok, I did my homework. Therefore, I present the following figures. The first one contains two columns. The one at the left of the figure shows the fiscal revenues (and the institutions behind of them) when the international oil price increases by $ 1 per barrel; the second column shows the subsidy insert in the diesel oil imports according the same increase in the international price.

blog.11.02.20 01

Fortunately, the situation is largely positive, nearly 45 million U.S. $ in favor and 6 against, that indicates that the gas revenues more than offset the subsidy for the diesel oil imports. However, as in Condorito comic, a secondary character is not going on very well.

This "secondary character" is the National Treasury (TGN), the main fiscal institution of Bolivian Central Government. The TGN is in charge of national expenditure, which of course includes the subsidy on imported diesel oil. In this sense, while this institution receives a small share of gas revenues (see the red area of column 1), it spends 100% of the subsidy on diesel oil (see column 2), paraphrasing the Condorito hotel "7 millions come (from the natural gas sales), 6 millions go out (from the diesel oil subsidy)... and if we are not careful, more than 6 will go out."

Why are we in this situation? The answer is simple: oil production - in particular the oil used to obtain diesel oil - is declining, see the second figure. I've discussed this situation in the post "The unpleasant Demand Law".

blog.11.02.20 02

Perhaps one of the most interesting ways to reverse this situation is to modify the criteria for determining the internal prices of major oil products. Some successful examples can be found in this publication (click). Concluding and following the Condorito's ending tradition, let me express my opinion of this situation: "plop".

 Mauricio Medinaceli Monrroy

 

La Paz, February 20th, 2011

 

 

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In the Blog section I invite you to read: "The future of Bolivian natural gas exports to Brazil"

 

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