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Subsidies: The Cost of Cheap Gas

by Elaine Schwartz    •    Apr 13, 2013    •    1356 Views

Sort of like lunch and parking, there is no such thing as free gas.

Lunch? Even when someone else takes the check, you have sacrificed time or a future payback to that person.

Parking? Time spent looking for a space and unproductive use of valuable urban real estate are 2 costs of free parking.

And now, we can add gasoline to the list.

Although Venezuelans enjoy 4 cents a gallon gasoline and 5.8 cents for premium, they pay in a host of other ways. Starting with oil production, the cost is inefficiency. Low prices mean less revenue that could be used to update facilities and produce more oil. Thinking of the law of demand, when something is cheap, we use more of it, even when its marginal utility plunges. Venezuelans use almost 7 times as much gasoline as neighboring Colombians who pay a market price.

Less tangibly, cheap gas creates perverse incentives. Driving unnecessarily, Venezuelans emit more greenhouse gases. Seeing the opportunity to sell gas to neighboring Colombians, they smuggle. In large, gas guzzling 1970s vehicles with full tanks, “pimpineros” drive across the border. If you pay close to 5 cents and then sell it for $2, depending on how much gas you burn in traffic jams, you can earn $25 a day.

And finally, the distortion takes us to post-Chavez politics. A mainstay of the Hugo Chavez regime, gas subsidies will be tough to eliminate. Any economically savvy candidate who wants to diminish government support and grow the economy will probably be defeated. As a result, the cost of the cheap gas is also wise leadership that will grow GDP (below from WSJ).

Fossil Fuel Subsidy-GDP Cost

Not quite as high as in Venezuela, fossil fuel subsidies that help consumers abound in developing nations. Areas in red indicate the world’s highest fossil fuel subsidy rates, 2009-2011 (based on IEA data).

Areas in red indicate the world's highest fossil fuel subsidy rates.

Fossil Fuel Subsidies based on IEA data from

Any benefits? The WSJ tells us that one 2011 report concluded that Yemeni fossil fuel subsidies diminished their poverty rate by making more money available to spend elsewhere.

Still, whether looking at cost or benefit, fossil fuel subsidies that benefit the consumer will always return us to the law of demand. When price falls, we are willing and able to buy more because we experience a lower opportunity cost.

Sources and Resources: Two excellent articles on fossil fuel subsidies were here, at WSJ.com (the source of my Venezuela facts and the GDP graph above) and here in the Guardian. Complementing the articles, more data and discussion are at the IEA website, in an OECD report (source for map), and at the Institute for Energy Research, my source for the bottom graph. In addition, this interactive map from National Geographic is fascinating and includes supply side subsidies like those in the US. Finally, this econlife post has more on Venezuelan market distortions.

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