Region - Everyone is angry about gasoline prices

The rise in fuel prices is a top story in nearly every country in the region. Here are four specific ways it can impact politics and security.

Everyone is angry about gasoline prices. You already know this. You might be angry about gasoline prices too. It’s a leading story in media outlets around the world and has been on the front pages of newspapers across the region all week.

There is a simple and obvious story in which high gasoline prices lead to public anger, in turn leading to lower approval ratings for politicians. That’s certainly occurring in Latin America and resembles the narrative I mentioned about food prices a few weeks ago. But there are at least four specific challenges with higher gasoline prices:

1. Higher fuel prices create tensions with unions of bus, taxi, and cargo truck drivers.

All three groups are politically influential and have the potential to strike, shutting down ground shipping and transportation options for much of the population. The longer the higher fuel prices last, the more likely these sorts of strikes become, which could have sweeping effects on local economies if long-lasting. 

This issue is already taking shape across the region. Mexican truckers are going on strike today. Bolsonaro faced some trucking strikes late last year over fuel prices and those trucking groups continue to hold on to that threat as leverage. Peruvian transportation unions used the threat of a strike last week to get a meeting with a cabinet minister. El Salvador’s government is at odds with transportation workers over how fares are being managed.

2. Higher energy prices squeeze government budgets.

Politicians try to keep prices down by limiting price increases, dropping taxes, and increasing subsidies. All three of those methods end up hitting government budgets and creating secondary consequences.

Brazil, once again, is a useful case study in this: Petrobras has become a political punching bag in the current election year. The country produces a significant amount of oil, but if Bolsonaro forces the company to limit its prices for Brazilian consumers, the company can’t benefit in a high price environment and can actually lose money in some cases. In El Salvador, Bukele has reduced taxes on fuel. The fuel price tax is also a campaign issue in Costa Rica’s election.

Policies that manipulate the prices of energy often end up creating a wide number of negative secondary consequences. For example, gasoline station owners often would rather shut down or run out of gasoline than lose money on every tank sold. This leads to potential shortages at local levels.

Additionally, any attempts to keep prices artificially low also disrupts market incentives to move away from fossil fuels. Citizens don’t care much about that in the short term, but it certainly impacts the long term issue of climate change.

3. Higher energy prices highlight corruption in energy firms.

For the public, corruption is more tolerable when prices are low and becomes more of an outrage when prices are high. Articles about corruption at energy firms, particularly those that are owned by the state, get fast tracked to the front of the media cycle. With citizens already angry about high prices (whether or not officials can control those prices), the people in charge of energy issues within the government could soon be in the spotlight.  

One example we’re seeing already is occurring in Peru, where controversy has hit the leadership at PetroPeru over a delayed audit and a potential default, and has caused the CEO to resign. The company, alongside President Castillo, has also been named in investigations on irregularities on securing supplies of biodiesel, furthering the company’s and the administration’s decline in public perception.

Higher prices also lead to opportunities for arbitrage and manipulation of contracts at state energy firms. Presidents demanding instant solutions to energy price challenges create incentives for bureaucrats to cut red tape and in the process that leads to cutting essential measures that would help limit corruption.

4. Higher energy prices incentivize criminal organizations for theft, resale, and extortion.

Stolen fuel is already a major activity for large criminal organizations around the hemisphere, especially in Mexico where some of the largest “drug cartels” have industrialized the fuel smuggling process there. It’s also tempting for criminals to operate anywhere governments are manipulating prices. That used to be particularly true along the Colombia-Venezuela border, though the profit opportunities are reduced now that the Maduro regime has largely dollarized prices (50 cents per liter is still quite cheap, but not the virtually free prices that it was before). 

In addition to theft, smuggling and reselling, threats, blockades and attacks against energy infrastructure also become more impactful. The longer energy prices remain high, the more criminal groups are incentivized to focus on the profits and leverage they can obtain in the sector.