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Venezuela's Days of Super-Cheap Gasoline May Be Over

Venezuela has the planet's cheapest gasoline: At 12 cents a gallon (3 cents a liter), it costs about 30 times less than bottled water.

But falling oil income and sagging crude output could soon mean a pinch at the pump in oil producing countries like Venezuela, where hefty government subsidies have for decades guaranteed cheap fuel.

Iran is already cutting back, while Venezuelan President Hugo Chavez has revived talk of a price hike for the first time in 12 years — a politically unpopular move that two decades ago sparked deadly riots in Caracas. "One day, prices will need to be adjusted," Chavez warned recently in a televised speech. "We're practically giving away gasoline."

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To spread wealth and buy support, many oil producing nations subsidize fuel for domestic consumption. Gasoline sells for as little as 39 cents a gallon in Iran, 60 cents a gallon in Saudi Arabia, and $1.52 a gallon in Iraq, where prices were ratcheted up following the U.S. invasion.

The global economy has crashed, however, and so has the price of oil. The same countries that used billions from crude exports to subsidize gasoline at home, even as prices hit record highs elsewhere in the world, are now under tremendous strain.

Iran, with the world's fourth-largest oil reserves, reduced its most heavily subsidized monthly ration by 20 percent to 26 gallons per car in March. Malaysia, where subsidies ensured some of Southeast Asia's cheapest gasoline, increased prices by 40 percent to $3.31 a gallon last year, sparking nationwide protests. Net fuel importers Indonesia, Taiwan and India also reduced subsidies.

In Egypt, many people believe the government has kept gas prices unchanged despite crude's fall to recoup some of the $11.4 billion it spent on subsidies when oil peaked last year. Their counterparts in Russia, which vies with Saudi Arabia as the world's top oil producer, have a similar complaint, even though their government doesn't subsidize gasoline.

Venezuela still has the world's cheapest gasoline, according to the Washington D.C.-based consulting firm PFC Energy.

Venezuelan leaders have largely avoided raising gas prices since 1989, when more than 300 people died in rioting after the government allowed energy prices to rise. Chavez's predecessor, Rafael Caldera, did slash subsidies in 1996 and 1997; but while Chavez, who took office in 1999, eliminated cheap leaded fuels, he has otherwise left prices unchanged.

Chavez's government won't say how much income it forgoes each year to reduce domestic fuel costs. But the Caracas-based consulting firm Ecoanalitica estimates that Venezuela last year lost $8.8 billion.

What's more, costs are now rising for Venezuela as output sags at the nation's aging refineries. The world's 11th-biggest oil producer has been forced to import a growing amount of gasoline.

When asked by The Associated Press about maintaining the subsidies, Oil Minister Rafael Ramirez said only that the price tag is "very high."

Economists warn that Venezuela is now in a tough spot. Raising desperately needed cash by lowering subsidies would almost certainly fuel inflation, which at 29.5 percent in Caracas is already Latin America's highest.

When gasoline prices spiked for much of the rest of the world last summer, there were radical changes in consumer behavior and governments quickly revisited their energy policies. That did not happen in Venezuela.

People like 46-year-old Daniela Leon, who owns a bathing suit shop in an upscale Caracas neighborhood, jump in their cars for even the briefest errands. "It doesn't matter, because it's just 3 bolivars ($1.40) to fill the tank," said Leon, who goes everywhere in her two-year-old Renault. Her husband and son each have their own cars.

That attitude has jammed streets with gas guzzlers. Car sales soared an average 68 percent a year between 2003 to 2007, as access to credit spread. Sales dipped in 2008 when the government restricted imports, but were still triple 2003 levels.

The traffic is overwhelming. Arnold Montero, a 42-year-old civil engineer, drives to work two hours early to avoid the rush, then dozes in his car until the office opens. But even he opposes a price hike: It would only make family outings to the beach tougher to afford on his salary of $1,395 a month, he said.

Critics say gasoline subsidies disproportionally benefit the middle and upper class, who are more likely to buy cars and drive them more often. According to Ecoanalitica, Venezuela's richest 25 percent consumes nearly nine times the gasoline used by the country's poorest quarter. "You're giving a subsidy to people who don't need it," said Abelardo Daza, an economist at the ODH consulting group in Caracas.

The government should eliminate subsidies on the high-octane fuel burned by costlier new cars and use the proceeds to upgrade refineries to process more gasoline, more cheaply, at home, he said.

Venezuela last year borrowed $3.5 billion from Japanese investors to refurbish aging refineries, closing parts of the El Palito complex for 10 weeks this spring in hopes of boosting gasoline output in 10 of the country's 23 states later this year.

State oil company Petroleos de Venezuela SA, or PDVSA, wanted to build three new refineries by 2012 — but falling oil prices have put most of those plans on hold, said Carlos Rossi, an independent oil consultant in Caracas.

Economists predict the government will be forced to raise prices, slowly. That makes 36-year-old taxi driver Victor Bolivar wary. "If gasoline goes up," he said, "food goes up, everything goes up. But the one thing that doesn't go up? Peoples' salaries."

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