Oil Subsidies and what a grandmother told me: «Licenciado, my husband died in the ‘Chaco’ War defending the Bolivian oil»

Oil Subsidies and what a grandmother told me: «Licenciado, my husband died in the ‘Chaco’ War defending the Bolivian oil»

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Certainly there are events that impact the life of one person, in particular, anecdotes, stories, etc.. can be really turning points in our way of thinking and acting. In this new post I want to start this text with two personal anecdotes… of course, always referred to one of my passions, the hydrocarbon’s economy.

More than ten years ago I worked in Bolivian Vice Ministry of Hydrocarbons, there, with a group of excellent professionals we did our best trying to do things well, especially with those variables of high social sensitivity, naturally the LPG price is one of them. This experience would be part of a couple of lines in my CV and some new and good friends, but was one person who made me think a lot. When I was talking about the efficient policies, the need to eliminate subsidy prices and blah, blah, blah this person told me: «Licenciado»… ok, this Spanish word deserves some attention to my few English readers: in many countries in Latin America, there’s a particular way to show respect, calling to professional people by her or his bachelor degree, for example: «Doctor, Licenciado or Ingeniero.» Of course some people is not happy with that… there’s the believe of some discrimination inside this words. Ok, nevertheless, this person told me: «Licenciado, why do I have to be worried when the international oil price is growing… if the oil is a ‘Bolivian oil’?»

The second anecdote was in 2004, when I was giving a speech in the Human Rights Assembly of Bolivia, explaining  the efficiency of tax systems, the main virtues of oil contracts, the fiscal revenues of recent years and all that topics that could sleep to any hard Red Bull drinker. When the question time was opened an old lady… and when say old I’m talking 80 or more told me: Licenciado, my husband died in Chaco War defending the Bolivian oil, for that reason, the oil belongs to all the Bolivians.»

Needless to say that I meditated too much time with these two stories and I came to the simple conclusion that, unlike mining or timber (both natural resources), the oil sector (which includes natural gas) has a greater social component and, therefore many additional challenges have to be solve. What I mean? Let me give an example, the gasoline price is often asked to solve three problems: 1) fiscal one, with higher taxes, 2) energy one, which encourages investment and 3) social one, through subsidies. This, of course, presents the serious problem of three objectives with on instrument… the gasoline price. Let me put in this way, when a Latin American country placed high taxes on the price of silver, tin, copper, etc.. no bog social problems arise because poor families doesn’t cook with these minerals; but when a Government creates (or raise) oil taxes (production or consumption) many people gets angry, the reason? the transport and cook costs for families are higher.

Is here where, like Anakin (Star Wars fans will understand me), there’s a short circuit in my head. What to do? When the price of gasoline, diesel oil and LPG have to be efficient but, at the same time, involve an important social component. To explain my point, I share with you two graphs that I build as a result of the various TV and radio interviews regarding the implications of an increase in the gasoline, LPG and diesel oil prices or as people like to say the: «gasolinazo».

Using excellent information from ECLAC I compare the gasoline price (in US dollars) in some countries of Latin America. The chart below shows us how the producer countries (Bolivia, Ecuador and Venezuela) have the lower prices of the sample and the oil import countries have higher prices (Uruguay, Chile, etc).

So far I didn’t present anything new. The real fire comes now, in the following graph I present the gasoline price as % of the minimum wage in each country… what, what, what? When I presented graphs like above the usual criticism was: «Ok Mauri (the diminutive for Mauricio) you compare Bolivia with Brazil or the United States, as if people in all three countries will be earning the same salary». This criticism is completely valid, is not fair to compare them because a worker in the U.S. on average earn more than one in Bolivia. That’s why I’m trying to relativize the gasoline price with the living cost (in other post in this blog you will find the same graph using the GDP per capita).

How the chart could be read? A good approach would be: a poor in Mexico spend 10 (yes… ten) times more than and USA poor to buy the same liter of gasoline; a Bolivian poor spend almost seven times more. Look at the change with Bolivia, using absolute figures Bolivia was in the group of countries with the lower price but, using relative figures now Bolivia becomes part of the «expensive countries group», why? Because we are poor people…»pues», if you want to pronounce this word in Spanish (very Bolivian) you can use «pooas».

What to do? My fellow economists will say, «is the classic dichotomy between efficiency and equity» or worse «is the trade off (yes… we like to talk like that) between efficiency and equity.» But hey, dichotomy or trade off, the problem is there: what to do? In this sense, Brazil offers an excellent experience, they replaced the price subsidy for a lump sum subsidy using «bonos» or cash transfers to the poor people.

The other day I spoke with a good economist friend and I said, «in my next microeconomics course I’m planning to throw away all the Walrasian equilibrium»… she agreed with me. Efficiency is killing and driving away economists from the real-world, humans don’t hate inefficiency… they hate injustice.

Mauricio Medinaceli Monrroy

La Paz, December 12, 2011