08 Feb Natural gas and Liquefied Petroleum Gas consumption in Bolivia
The debate over the pricing policy for liquefied petroleum gas (LPG) and natural gas in Bolivia focuses on whether these prices provide the right incentives to promote greater investment and, consequently, generate production levels that can meet domestic demand for both energy sources. Given that their current prices are below international opportunity costs, it is often argued that these prices, particularly that of LPG, are subsidized.
Since the concept of a subsidy has a broad scope, discussions about subsidies for these two products are, to say the least, often contentious. On one hand, it is argued that a subsidy exists only if production and commercialization costs exceed the final sale price. On the other hand, it is claimed that a subsidy does not necessarily arise only when costs exceed the final sale price; rather, it could also occur when, even with low costs, the domestic market price is lower than the international opportunity cost.
Of course, adopting either of these perspectives leads to different energy policy decisions. If a subsidy is considered to exist only when costs exceed the price, the policy decision might be to raise the price to match total costs, even if the final price remains below the international opportunity cost. Conversely, if a subsidy is considered to exist whenever the domestic market price is below international prices, the policy decision might be to increase the domestic price until it equals the export parity price, even if this final price exceeds production and commercialization costs.
Choosing the first option does not seem optimal, given that the market operates relentlessly—when domestic market prices are below international opportunity costs, two negative consequences arise: (1) informal trade increases demand significantly, and (2) investment in expanding a country’s productive capacity drops noticeably. On the other hand, the second option—setting domestic market prices at their export parity price—entails significant social costs, as summed up in a comment I once heard from a wise homemaker: “I don’t understand why, if we have so much gas, we must suffer every time the international market price goes up. Isn’t it our gas?” Naturally, it is the job of energy and social policymakers to address these issues, not that of the homemaker.
With the aim of providing more analytical tools for such a complex situation, this document presents some statistics on natural gas and LPG consumption in Bolivia. In particular, it examines the characteristics of the households that consume these products. If the country decides to implement a subsidy in any of the aforementioned forms, it will be necessary to determine who benefits from it and, perhaps more importantly, why.
The results presented here are part of a broader study conducted by Medinaceli (2009), in which a demand function for natural gas in Bolivia was estimated to analyze changes in household welfare under different final sale price scenarios. Due to typical constraints, this document will only present general statistics on natural gas and LPG consumption.
It is important to note that the primary source of information is household surveys conducted under the Household Survey Improvement and Living Conditions Measurement Program (MECOVI), periodically carried out by Bolivia’s National Institute of Statistics (INE). These surveys cover key household characteristics related to employment, health, education, infrastructure, etc., making them a valuable source of primary data.
The following table shows natural gas consumption, expressed in energy terms, for each income quintile in urban areas of the country. For example, in 2007, families in the first income quintile (the poorest) reported consuming an average of 0.691 MM BTU/month, whereas families in the fifth quintile (the wealthiest) reported an average consumption of 1.134 MM BTU/month—64% more energy than the poorest families. This indicates a strong correlation between natural gas consumption and household income: higher income… higher consumption.
Average Household Natural Gas Consumption (MM BTU/month)
The next table presents LPG energy consumption for each income quintile in urban Bolivia. It also shows that higher household income is associated with higher LPG consumption, although the correlation is weaker than with natural gas. For instance, in 2007, the wealthiest quintile consumed 64% more natural gas than the poorest quintile, but in the case of LPG, this figure dropped to 39%. This suggests that wealthier families consume proportionally more energy than poorer families when using natural gas. In other words, when households have access to natural gas, total energy consumption increases—likely due to a stronger substitution effect. For example, an electric water heater can easily be replaced with a natural gas heater, but if a family only has access to LPG, substitution is not as straightforward.
Average Household LPG Consumption (MM BTU/month)
The next table shows the percentage of urban households using natural gas for cooking, by income quintile. For example, in 1999, only 1.1% of first-quintile families used natural gas, compared to just 0.6% of fifth-quintile families. However, with Bolivia’s policy of expanding natural gas distribution networks, the percentage of households using this energy source has increased—especially among higher-income families, who have benefited the most from the expansion.
Natural Gas Usage by Income Quintile – Urban Areas
This brief analysis suggests the following hypothesis: households that benefit the most from a natural gas connection are those with higher incomes. The reasons for this could be: (1) these families are more likely to convert their durable goods portfolio (e.g., water heaters or air conditioners) from electricity to natural gas; (2) poor households generally use LPG only for cooking, so a natural gas connection provides some monetary savings but on a smaller scale; and (3) while not reflected in the presented statistics (as they focus only on urban areas), national data (urban and rural) show that the poorest households in Bolivia use firewood and dung for cooking, meaning they do not benefit from LPG and natural gas price subsidies.
A key limitation of this study is the lack of surveys specifically focused on households’ final energy consumption. While the models and results presented here are internally consistent, they should be confirmed and re-estimated using new, sector-specific surveys. Nevertheless, the findings are striking: Bolivia’s large natural gas reserves and the push to encourage its consumption do not always lead to socially progressive policies.
Finally, it is worth reflecting on the anecdote of a poor family in Bolivia’s Chaco region. Despite lacking sewage, potable water, and communication services, they have a brand-new natural gas connection right at their doorstep.
S. Mauricio Medinaceli Monrroy
La Paz
December 1, 2010
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