Oil pricey, but Latin America hooked on cheap fuel

By Brian Ellsworth - Analysis

CARACAS (Reuters) - Latin American states from energy-starved Chile to oil powerhouse Venezuela are growing dependent on expensive fuel subsidies that could lead to future economic shocks if countries are forced to raise prices.

Drivers in Latin America's traffic-choked capitals can buy fuel for as little as 12 cents a gallon thanks to government handouts costing billions of dollars per year, even as high fuel prices spark protests and political fallout around the world.

The subsidies are boosting global oil demand and stalling investments that would increase much-needed fuel efficiency as crude prices hover near $120 per barrel and tight supplies have left countries scouring the globe in search of energy.

"Latin American countries' dependence on subsidies has left them short of options -- they are going to avoid dealing with the problem for as long as they can," said independent consultant Roger Tissot, who specializes in Latin American energy issues.

Soaring prices of commodities like copper and soy have benefited Latin America by boosting the value of its exports, but the simultaneous jump in energy costs has also given countries higher energy bills and rising inflation.

The region's new crop of leftist leaders is sheltering poor supporters from rising costs through subsidies and price controls, ditching the Washington-backed free market wisdom of the 1990s in favor of decades-old populist traditions.

The subsidies could become unsustainable if prices of commodities fall sharply -- which now seems more in the realm of possibility after crude oil tumbled by more than $20 per barrel last month.

But governments will likely postpone any major fuel price changes given the high political costs involved.

In Venezuela, which boasts the world's most inexpensive gasoline at only 12 cents a gallon, officials may remember how three days of rioting broke out in 1989 after the government hiked fuel prices.

GOVERNMENT ENABLERS

The region's biggest energy subsidizers are also its exporters -- Mexico and Venezuela, which this year will lose some $19 billion and $10 billion, respectively, to keep fuel cheap.

In Argentina, where energy supplies are perennially deficient in part due to price caps, the government is importing natural gas and selling it on the domestic market for around 13 percent of cost.

Chile, which imports nearly all of its hydrocarbon energy, in June set aside $1 billion to ease fuel prices, but many consumers say the move is not enough and also want the removal of gasoline taxes -- which the government has not agreed to.

Mexico's subsidy of around $1.40 per gallon of gasoline, for decades a boon to domestic drivers, is now luring bargain-hunting U.S. drivers from across the border.

Rising oil prices have increased the cost of Peru's diesel subsidies that help control trucking costs for consumer goods, but Peruvian President Alan Garcia is unlikely to reduce them because he faces approval ratings of below 30 percent.