Two years before his death, Hugo Chávez tried to repeal the law of supply and demand, which says that free markets set the price: the higher the demand, the higher the price. Every producer who was willing to sell at that equilibrium price would be able to do so and every consumer willing and able to pay that price could acquire the product.
Chávez despised the law because he believed it robbed the poor and unjustly profited producers. In its place, he persuaded the Venezuelan legislature to enact the 2011 Law on Fair Costs and Prices, a price-setting mechanism to ensure greater social justice. A newly created National Superintendency of Fair Costs and Prices was empowered to establish fair prices at both the wholesale and retail levels. More than 500,000 price edicts have been issued. Companies that violate these price controls are subject to fines, seizures and expropriation.
In all cases, the prices set by the government have been below market — sometimes far below. This has caused production cutbacks, market shortages, massive government subsidies, runaway inflation and extraordinary government intervention. The most flagrant subsidy is for gasoline. Venezuelans pay only 4 to 6 cents per gallon for gasoline, the cheapest in the world. But it costs Petroleos de Venezuela, the government-owned oil company, close to $2 a gallon to extract, refine and distribute it. With domestic consumption now running about 600,000 barrels a day, the financial loss on subsidized oil is roughly $20 billion a year.
Worse yet, rising domestic consumption combined with declining domestic production has squeezed oil exports, depriving Venezuela of much-needed hard-currency income. When the government tried to raise gasoline prices years ago, riots erupted. Since then, the government’s only lever for curbing gasoline consumption has been exhortation.
Because Venezuela is still one of the world’s biggest oil producers, the artificially low price of gasoline hasn’t caused any domestic shortages. That is not the case, however, with other consumer products. The wholesale price of coffee beans was fixed in 2003. As rising production costs eventually made coffee farming unprofitable, growers cut back on planting. Chávez responded by expropriating the largest Venezuelan coffee producer and taking a 50 percent stake in another. The government now controls nearly 80 percent of coffee production, with small farms supplying the rest.
Despite this intervention, Venezuela doesn’t produce enough coffee to meet domestic demand. The nation has been transformed from a coffee exporter to a coffee importer. Last year the government had to import more than 80 million pounds of coffee (600,000 bags) to help bridge the gap between the quantity demanded and the quantity supplied. Even at that, consumers line up early at government-run stores when coffee deliveries are anticipated.
The same kind of acute shortage bedevils the corn flour market. Bread prices are set artificially low to ensure that everyone can afford it. So is the price of corn flour. When bakeries can get some corn flour, however, they want to use it to produce higher-priced products such as specialty breads, not low-priced shelf bread. Shortages of both corn flour and bread result. In the black market, corn flour prices have been 50 percent above government price ceilings. The government has responded by accusing flour distributors of hoarding and by seizing their inventories for distribution to the people.