The Construction of Reality: The LPG market (please note that this is a very weak translation)

The Construction of Reality: The LPG market (please note that this is a very weak translation)

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Clearly the title of this new exciting text invites a review of the existing literature about such a concept: our understanding of reality. Since the author never dare swim in unfamiliar deep waters, I will just tell a story, from my point of view, that will serve as starting point for the thta I want to introduce later.

Thanks to my good friend Dave Daves, a South African coworker, every day (through his stories and comments) I discover a fascinating country full of problems, as in all our countries. However, is a family story that struck me deeply. Dave has a younger son… Bredan who when he was between 5 or 6 years old had a very good friend. The issue is that they were such a good friends that both insisted  to presents their parents, the parents naturally agreed and they had a friendly meeting. When the two families finally met each other, Brendan told his friend: «Why you didn’t say that your dad is black?» which naturally caused the laughter of all, dads and moms. And so, dear friends, the innocence of a couple of kids called me to reflect on how we create our reality, with his great friend, Brendan was concern about the plays and games and not by the color of the skin.

This story made me think for many days, especially because I wanted to share with your in this blog and, in some way, relate to some aspect of the energy sector. Then I realized that every day we are in the business of understand our reality and, myself, through this space, try to do so through the numbers, statistics and, where possible,  international indicators. Thus, in an effort to help build our reality, I want share with you some indicators in the LPG market.

Some time ago I made a comparison between the price of LPG and wealth per capita in selected countries, see link. I presented, at that moment,  a chart like the one attached below, in this figure you can found the LPG price as a % of the per capita wealth in each country. How can we read this?   In Nicaragua, for example, people spend much of their wealth to purchase LPG and, on the other hand, in Venezuela people spend a smaller percentage of their resources in LPG. My country, Bolivia, in «green» is in the seventh position, from left to right.

Well, so far nothing new. The next question asked is: If the previous results are true, then we would expect that people in Nicaragua (for example) use less LPG? o That people in Venezuela use more? in that sense,  I went to the fantastic database of OLADE (and. .. a little marketing doesn’t harm). In this institution, the statistics department offers a comprehensive set of data and statistics from Latin America and The Caribbean. I invite you to review the page where you can access to this data base and other publications, see link. OLADE is the only institution representing officially the energy ministries throughout the region … for it and as we like to say to the Latin Americans, these «are official data».

With the information available, I estimated per capita consumption of LPG for the countries of the chart above … What? I tried to calculate how much LPG is consumed annually by an Argentine, a Bolivian, a Peruvian and so on…  for all countries, the graph I got is fantastic and is  attached below. Note how amazing is the Nicaragua and Venezuela are placed at both ends? That is, if we look at the graph above we see that just in Nicaragua people spend a good % of their income when they purchase LPG, on the other hand, Venezuela uses a lot of LPG, coincidently (or not) the % of their income used to buy this product is the lowest of the region.

Almost at the end of this text, please see (in the last Figure) how elegant and cute is the relation between this two variables, in one word: Fantastic!

They say, and not without reason, that one ends up taking the soup prepared by itself many years ago … I think this applies to the LPG market. What do I mean by that? Imagine that the president of a country doesn’t want to «harm» people’s pocket and decides to subsidize LPG consumption through low prices, people, as we may expect… consume more LPG (as we saw). Time passes and the situation becomes unbearable, people consume more and more LPG and the subsidy, like a snowball, grows and grows. Then comes the time of adjustment, the people of that country, accustomed LPG consumption, suddenly sees that this product is more expensive, naturally get upset and «the battle begins.» To this phenomenon the economists call «Demand Law».

What to do? As we see in the graphs, people tend to be efficient, when the price of a good is relatively expensive tend to consume less and look for  better alternatives … see Nicaragua for example. Then maybe it’s time, in any of our countries, to stop the growth of the «snowball» that I mentioned earlier, not destroyed only stop the growth of this snowball. How do you translate this energy language? Perhaps it is time to link domestic prices to the international opportunity, using as an starting point the current price… after we will see how to eliminate the current gap. 

The life, my family, my teachers, my friends… in way way or another, I learn from everyone, from Brendan to my dear microeconomics teacher Magda Lahore. Therefore I am happy and lucky to see these numbers and share  you the results. I firmly believe that a proper understanding of our reality will help us to build a better place to live. Today I am happy!

Mauricio Medinaceli Monrroy

Kabul April 28, 2013

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