Wednesday, March 9, 2011

Why expensive car fuel is a bargain for Colombia

High gasoline prices got us pedaling! (Photo: Flickr)

Over the past week, on radio call-in shows and newspaper letter pages, Colombians have complained about rising gasoline prices. Few realize that the more they pay, the better the deal they get, at least in the long term.

The Colombian government has been carrying out a gradual, years-long policy of reducing fuel subsidies and allowing prices to slowly float to international market levels. On March 1, they raised the gallon price in Bogotá by 210 pesos, to 8,299 pesos, or $4.39 per gallon. Good for them!

Traffic jam in Bogotá. Higher gas prices benefit even  drivers,
who save in time what they pay at the pump.
Yes, gasoline costs more in Colombia than it does in the U.S., a far-wealthier nation. Yet, even here, I'm willing to bet that drivers don't come close to paying the external cost of cars: the infrastructure, pollution damage, traffic congestion, police and emergency services, etc - and that's without mentioning driving's broader environmental impacts including global warming and the deforestation caused by oil drilling.

And, unlike nations such as the U.S. and Canada, where the great majority of people own cars, here in Colombia it's the small middle and upper classes who drive private cars, meaning that fuel subsidies go disproportionately to the wealthy. The subsidy bill came to three billion pesos in 2004, one fourth of the budget of the city of Bogotá. The money could much more productively - and justly - be spent on health, education and housing for the poor.

Bad investment.
In fact, gasoline and diesel fuels should not only be allowed to rise to their international market prices, but the country ought to tax them like crazy. Less domestic gasoline consumption means more oil to export, less pollution and traffic congestion at home, and a healthier population. Imagine $10/gallon gasoline - and uncongested, unpolluted streets full of bicyclists and walkers.

Colombia only has to look at its two biggest trading partners, the U.S. and Venezuela, to see the disastrous impacts of car culture fueled by cheap gasoline. The U.S. suffers epidemic levels of obesity, heart disease and diabetes in great part because many people do no more physical activity than walking to their cars and back. And don't forget the nation's petroleum-fueled trade deficit and economic dependence on often hostile authoritarian regimes, such as Saudi Arabia and Venezuela. Venezuela, for its part, subsidizes gasoline down to a few cents a gallon - and pays a horrendous price in traffic jams and pollution and a huge economic burden, which some analysts say could drive it to bancruptcy. (But almost-free gasoline does benefit one Venezuelan: Hugo Chavez, who buys votes.)

Subsidize my life - and death!
It's no concidence that the three nations in the Americas with the highest gasoline prices - Brazil, Chile and Uruguay - have three of the region's healthiest, fastest-growing economies. Similarly, most Europeans pay far more for gasoline than North Americans do - and enjoy better health and higher living standards.

I've never quite grasped why gasoline subsidies are the ultimate populist tool, when direct subsidies for food, shelter and school supplies would benefit the poor much more. In oil producers like Venezuela and even Colombia, cheap gasoline has a nationanalistic element, as in 'the oil's ours, so we should get it for free!' But I haven't heard many calls for subsidized milk, coffee, bananas or chocolate.

By Mike Ceaser, of Bogotá Bike Tours


juancamilog said...

one detail you ignore. goods in colombia (food, clothes, etc) are mostly transported, through the roads of colombia, on trucks that need gasoline or diesel to operate. If the gasolline prices rise like crazy, then the cost of transporting goods in Colombia will rise like crazy. If the cost of transporting goods from the production areas to the retailers is high, then the prices of the goods will rise. People earning less than the minimum wage are going to have to deal with more expensive food and clothes. Oh, and that is not taking into account the gasoline needed to operate the machinery used for manufacturing processes. So, high prices for gasoline in colombia is not a good deal. It is the worst deal EVER.

juancamilog said...

Oh, and another detail. PUBLIC TRANSPORTATION! With the exception of Medellin, most public transportation runs o n gas or diesel. Higher gasoline price will mean higher prices for public transportation. You can't expect that people use their bikes when they live, for example, in Suba and have to travel across the city to get to their workplaces, which in Bogota are mostly in the oriental part, in downtown or in the industrial zone in the south. Public transportation is necessary. Gasoline prices indirectly affect people who don't own a car. I suppose that is why subsidizing gasoline is a good idea. There are other ways for discourage the use of a car, e.g. what Peñalosa tried (but failed) to do: expanding the sidewalks while reducing the car lanes, adding more bike lanes and providing cheaper public transportation.

Miguel said...

Thanks for your comment.

You're right that fuel is part of the cost almost everything. But subsidizing SUVs and private cars is a very expensive and inefficient way to cut the price of food and bus fares.

If you want to cut the costs of food and public transit, why not just subsidize them directly?


Miguel said...

In Venezuela, where fuel is heavily subsidized, economists calculated that the wealthy received five times more of the subsidy money than did the poor.

People want cheap beer and bread. But they'll benefit much more from good schools and safe streets.


Miguel said...


Thanks for your comments. You're right that fuel costs contribute to the costs of food, public transport and other items. However, if we want to subsidize food and buses, then we should do so directly.

Subsidizing fuels means giving a lot to the rich in order to give a little to the poor - and causing lots of destructive effects, including traffic jams, pollution and global warming.


Boris said...

Totally agree with you BUT what you forget is the Ecopetrol - the one company which makes all the profit from high prices - and its - rich - actionaries, are making the money out of that. Not the government, which in the end receives a fairly small part of taxes.
This is colombian typical... a cartel controlling prices in a way which would never be accepted in other countries... where can you find a company which has NO concurrence on the national market and making a 51 percent benefit ?? Mafia business, as usual, so please do not come up with stories on helping poor people through gas prices please !

Miguel said...

Hi Boris,

Thanks for your comment. EcoPetrol and the oil industry in general may not pay all they should in taxes and royalties, but they do pay a lot. If the state spends that money badly, that's the state's fault, not the system's. If gasoline were cheaper, not only would the state be using its resources to subsidize private car owners, who are middle and upper class, but presumably it'd collect less taxe money for social ends. You may be right that EcoPetrol should have more competition - but that doesn't change the fact that lower petrol prices would be a gift from the poor to the rich, as well as worsening problems such as air pollution and traffic congestion.

Miguel said...

here's a good article about petroleum taxes and their use.