Thursday, February 18, 2016

Venezuela raises gas prices 6,200%


Venezuela just raised gas prices for the first time in about two decades. 

Prices will now increase more than 60 times — to 6 bolivars a liter up from 9.7 centavos, a 6,200% increase according to Bloomberg's Javier Blas.

Using the weakest exchange rate of 202.94 bolivars per dollar, Venezuela's announced increase translates to about $0.11 a gallon, according to Bloomberg

Even with this price hike, however, Venezuela still has the lowest gas prices in the world!

Venezuela's government has long subsidized the country's fuel, allowing the people to have the cheapest gas in the world. Back in 1989, an increase in food and gasoline prices led to nationwide protests, which eventually led to the late President Hugo Chavez's rise. Venezuela last raised gas prices in 1996. 

Venezuela also devalued its currency on Wednesday, cutting the value 37% and taking its primary exchange rate to 10 bolivars a dollar from 6.3.

"The devaluation will ease the drain on government coffers by giving state oil company Petroleos de Venezuela SA more bolivars for each dollar of oil revenue, while higher gasoline prices will reduce expenditure on subsidies," wrote Bloomberg's Andrew Rosati and Pietro Pitts.

"At the same time, the devaluation will probably force the government to raise the cost of staple foods such as rice and bread that most of the country now depends on to eat," they added.

In the larger scheme of things, things in Venezuela have not been great as its economy has been crushed by lower oil prices. The country relies on the commodity for about 95% of its export revenue.

IMF figures suggest that Venezuela's GDP contracted by a record 10% in 2015 and is set to decline 8% in 2016. Inflation is expected to rise from a world high of 275% in 2015 to a mind-blowing 720% in 2016.

Given the situation, many economists and analysts think that the country is looking at another rough year.

"Perhaps no country in OPEC has suffered such a severe economic shock amid the collapse in oil prices as Venezuela," wrote RBC Capital Markets' Helima Croft earlier this week

"Given these severe headwinds, we believe that Venezuela’s economic fortunes – and its ability to avoid a humanitarian catastrophe – will largely hinge on whether China continues to open its checkbook to the country this year," Croft added.

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