Oil pricey, but Latin America hooked on cheap fuel

By Brian Ellsworth - Analysis

CARACAS (Reuters) - Latin American states from energy-starved Chile to oil powerhouse Venezuela are growing dependent on expensive fuel subsidies that could lead to future economic shocks if countries are forced to raise prices.

Drivers in Latin America's traffic-choked capitals can buy fuel for as little as 12 cents a gallon thanks to government handouts costing billions of dollars per year, even as high fuel prices spark protests and political fallout around the world.

The subsidies are boosting global oil demand and stalling investments that would increase much-needed fuel efficiency as crude prices hover near $120 per barrel and tight supplies have left countries scouring the globe in search of energy.

"Latin American countries' dependence on subsidies has left them short of options -- they are going to avoid dealing with the problem for as long as they can," said independent consultant Roger Tissot, who specializes in Latin American energy issues.

Soaring prices of commodities like copper and soy have benefited Latin America by boosting the value of its exports, but the simultaneous jump in energy costs has also given countries higher energy bills and rising inflation.

The region's new crop of leftist leaders is sheltering poor supporters from rising costs through subsidies and price controls, ditching the Washington-backed free market wisdom of the 1990s in favor of decades-old populist traditions.

The subsidies could become unsustainable if prices of commodities fall sharply -- which now seems more in the realm of possibility after crude oil tumbled by more than $20 per barrel last month.

But governments will likely postpone any major fuel price changes given the high political costs involved.