CARACAS — As US officials consider tapping the country’s strategic oil reserves to lower gasoline prices, analysts say a price hike is what Venezuela needs to wean itself from a consumer addiction that threatens to bankrupt this oil-driven economy.

“It’s criminal how cheap [gasoline] is,” said Gonzalo Ibarra as a gas station attendant fills up his shiny silver Mercedes Benz for less than a dollar. “I pay more for the tip than the gas.”

The 64-year old lawyer is in no need of a government handout but as a wealthy car owner is one of the biggest beneficiaries of a gasoline subsidy that’s costing the state’s economy at least $1.5 billion in revenue even as it struggles to recover after two consecutive years of loss.

Mr. Ibarra is unusual in that he says he would welcome a price hike but doesn’t believe President Hugo Chavez, who is facing an election next year, could pull off such a feat in a nation where cheap gasoline is considered a birthright. “It’s a very delicate matter.”

Gasoline in Venezuela costs about 12 cents a gallon, well below the $4 a gallon or more paid in most of the industrialized world.

Chavez was no doubt weighing all of these factors when he took to the airwaves recently to lecture the nation over gasoline usage.

“Every time you fill up your gasoline tank, you’re filling it up with the cheapest in the world; and the government is subsidizing over 90 percent of what it really costs,” Chávez said in a television address to the nation. “We must begin to reduce gasoline consumption.”

Subsidy fuels consumption

Successive governments have unsuccessfully grappled with how to raise prices, sometimes to disastrous effect. It was an unexpected gasoline price increase in 1989 that set off a week of deadly rioting.

The problem is not unique to Venezuela. Last December, Bolivia’s populist leader Evo Morales had to reverse a decree raising gasoline prices after his own leftist base went on a rampage. That same month, Iran posted troops at gasoline stations when President Mahmoud Ahmadinejad slashed the gasoline subsidy, quadrupling prices.

In Venezuela, local media seized on Chavez’s address, which hit a nerve among a population still smarting from last year’s difficult bout of water and power rationing. Additionally, Venezuelans already endure one of the highest inflation rates in the world, with food prices regularly climbing 30% a year, despite having some of the lowest energy costs.

Government officials quickly moved to quash the idea of price hikes, blaming the opposition for spreading misinformation.

“Where did the opposition get [the idea] that we’re going to ration gasoline or raise the price?” Oil Minister Rafael Ramirez later said during an address to the National Assembly. The government is requesting a more “rational use” of energy resources, not rationing, said Mr. Ramirez.

Nearly everyone agrees the artificially low price for gasoline fuels rampant consumption. “We drive around a lot and practically throw [gasoline] away,” Maria Eugenia Mored says as a gas station attendant tops off her Jeep Cherokee with 11 gallons for about 50 cents. “The streets are always packed.”

Such waste leads to reduced oil export revenues, hampering the national oil company’s ability to make badly-needed investments in its faltering production and refining capacity. Sweeping nationalizations have greatly curtailed outside investment into the oil sector, while massive cash transfers to the central government and rising capital costs also erode PDVSA’s, the national oil company, bottom line, say analysts.

“Even with oil prices approaching the $100 per barrel mark, PDVSA continues to face a very challenging financial situation,” said Juan Pablo Fuentes, a Venezuelan economist at Moody’s Analytics.

Gasoline goes missing

According to the Energy Information Agency, Venezuela’s refined product exports have fallen to almost 100,000 barrels a day from 379,000 barrels in 1997. Between 2009 and 2010, Venezuela was forced to buy millions of barrels of gasoline and blending components on the international market, an extraordinary situation that some liken to Saudi Arabia buying sand.

Because of the subsidy, PDVSA was paying as much as $60 a barrel for gasoline that was sold at home for the equivalent of $12 a barrel, says Gustavo Coronel, a former PDVSA board member and critic of Chávez’s oil policies.

“They cannot afford to go on like this any longer,” says Coronel,

Different analyst reports calculate that the subsidy’s true cost to the nation is between $7 and $10 billion, amounting to almost 5% of GDP. Barclay’s analyst Alejandro Grisanti said the subsidy is expected to climb to $10.5 billion this year as oil prices rise.

“The amount of money that PDVSA would collect if the subsidy were to be eliminated could significantly improve the company’s current situation, especially with oil production dropping,” said Ecoanalitica, a Caracas-based consultancy.

The difference between government and independent estimates stems from the government comparing the domestic price of gasoline to how much it costs PDVSA to produce it. Instead, analysts say, the domestic gasoline price should be compared to what it would earn abroad, thus reflecting the real loss of revenue.

In a bid to raise more cash, PDVSA regularly issues billions of dollars worth of debt, but is struggling to meet its obligations as Chavez has redefined the company’s mandate to not only produce and refine oil but also distribute food, support social missions, and sell petroleum at vastly discounted prices to friendly nations.

Incremental change

Adjusting the subsidy will have to be a gradual process, accompanied by a concerted government effort to raise awareness on how valuable gasoline is to the Venezuelan economy. Eliminating the subsidy all at once would be catastrophic, raising the price of gasoline by 2,380%, said Ecoanalitica.

Changing habits will be difficult where generations have been raised to believe that the nation’s staggering oil reserves are part of their national patrimony.

“I know it’s an important issue,” said Ingrid Bianco, who filled up her aging Corolla for the equivalent of a quarter. “But [Chavez] is giving away oil to his friends, why should we be the ones to pay more?”

Despite the current lack of political fortitude, the subsidy’s fiscal drain will eventually have to be tackled and even a minuscule price hike now would go a long way towards changing habits.

“With prices so low, any increase would not constitute an important source of government revenue and its main objective would be to promote rational use,” said Steven Ellner, who most recently authored “Rethinking Venezuelan Politics: Class, Conflict and the Chavez Phenomenon.”

Most observers believe that Chavez is unlikely to raise the price as he heads into elections next year. However, if the self-proclaimed capitalist foe does win a third term, he will have more political capital to impose the austerity measure than a newly-elected opposition, they say.

“He knows the that the subsidy represents an immense burden on PDVSA and the government,” said Fuentes of Moody’s. “It might take years to reduce the subsidy but the important thing is to start.”