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Latin American car ownership rising steadily

Subsidies and economic growth mean fuel consumption and car ownership will rise steadily

In Brazil's financial capital Sao Paolo the roads have become so clogged with cars that those who can afford it now take to the sky. Executives and officials ride helicopters from rooftop to rooftop for meetings and lunches to avoid the crippling gridlock below.

Sao Paolo's problem is extreme, but traffic-choked highways are a familiar sight in cities across Latin America. As strong economic growth over the past decade has improved the fortunes for many in the region, demand for cars, trucks and buses -“ and the fuel to keep them moving - has soared. The trend is likely to continue.

Across Latin America, vehicle ownership rose by more than 40% from 2000 to 2010, from 107 to 150.4 vehicles per 1,000 people. Only East Asia's booming economies saw faster growth over the period. Between 1990 and 2010, fuel demand for the transport sector doubled from 1.4 million barrels a day (b/d) to 2.8m b/d, according to the International Energy Agency (IEA).

The rapid rise has come in spite of surging international oil prices. This is because all of Latin America's major economies, in one way or another, shield drivers from the pain of higher prices at the pump. Opec-member Venezuela, where petrol is cheaper than water, is the poster child for fuel subsidies. While high oil prices have seen drivers in Europe and the US turn to smaller, more fuel-efficient cars, gas-guzzling SUVs still rule the road in Caracas.

Rising costs

Governments are paying an increasingly steep price for those subsidies, which are draining funds from budgets that could be spent on cash-starved education, health and welfare systems. Venezuela's spending on fuel subsidies rose from $10.4 billion in 2009 to nearly $22bn in 2011, around 7.5% of the country's GDP, according to the IEA. In Mexico, the cost of fuel subsidies has increased five-fold from $3.17bn in 2009 to $15.9bn in 2011. Argentina's subsidy bill has tripled over the period from around $500m to $1.7bn.

In Brazil, the rising cost of the country's fuel subsidies has caused a rift between the government and state-controlled Petrobras, which pays international prices to import fuel but has to sell it at a lower government-fixed price in the domestic market. The company has warned that the losses could hinder its ability to develop major offshore oil discoveries.

But that does not mean reform is necessarily on its way. The subsidies are politically popular, and efforts by governments around the region to reduce them have been met by protests. In 2011, Bolivia's Evo Morales was forced to backtrack from a pledge to slash such handouts after protests turned to riots and he was threatened with a nationwide transport strike that could have brought the country to a halt. No other countries have shown a serious appetite to tackle subsidy reform.

Governments also fear the inflationary effects of allowing fuel prices to rise. Central bankers and policy makers still have fresh memories of the fiscal crises that racked the region periodically throughout the past three decades. Most governments are now enjoying the fruits of relative economic stability.

Without reforms to encourage greater efficiency or innovative mass transit systems, fuel consumption is expected to grow steadily as more and more cars hit the road. The IEA expects fuel demand in the transport sector to rise more than 50% over the next 20 years, from 2.8m b/d in 2010 to 3.7m b/d in 2020 and 4.3m b/d in 2030 (see Figure 1).

For the most part, the region is expected to keep relying on conventional gasoline and diesel fuels. Research and development investment in alternative fuels and public transport infrastructure is low in the region, and without significant outside investment no transformations are expected. Brazil is the clear exception to this trend. In an effort to boost its energy security, and maximise oil exports, significant investment in sugar-derived biofuel production is expected. The IEA expects biofuel's share of overall transportation fuel in Brazil to rise from 20% in 2010 to a third by 2035. 

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