Prices rise at Peruvian gas pumps as government urges to switch to natural gas

Peruvian President Alan Garcia’s government this week cut down on fuel subsidies and increased prices at the pumps by 4 percent to fend off skyrocketing world oil prices.

“We didn’t expect the increase in the form of speculation,” Finance Minister Luis Carranza told reporters, explaining that the nation’s $464 million fuel stabilization fund offered a manageable cushion against rising oil prices up to $90 per barrel, but that it was being overloaded since crude surpassed $125 per barrel on the world market.

“If we didn’t react, the fuel prices stabilization fund’s spending levels would have reached 1.2 percent of our GDP, which is clearly out of control,” Carranza said.

With the 4 percent increase for 84 and 90 octane gasoline, which went into effect Monday, Carranza said government spending on subsidized fuel would be cut from about $36 million per week to approximately $24 million and should generate an increase in inflation of no more than 0.1 percent.

“The impact will be minimal. For diesel, the most widely used fuel for passenger and cargo transport, the increase is only 40 centimos,” he added, the equivalent of 14 cents.

Peruvian economist Alejandro Indacochea said the government was taking appropriate action, given that the stabilization fund should only be used when there are small variations in fuel prices and not as a long-term measure to control and subsidize prices.

“There will undoubtedly be an effect on the family’s bread basket,” he told CNR radio. “There will be a direct effect on fuel prices and an indirect effect on transport because it depends on the price of fuel.”

Some experts say the government should have acted more quickly to convert on a wide scale to low-cost natural gas, a fossil fuel abundant in Peru, to reduce the current hydrocarbon deficit and the country’s dependence on costly diesel and liquefied petroleum gas imports.

According to Aurelio Ochoa, a Peruvian hydrocarbon expert, the government is doing too little too late: “More than $600 million has been wasted and could have allowed Peru to change its energy grid to natural gas,” he told daily El Comercio. “Peru has abundant natural gas resources, but has done practically nothing to push ahead with the modification of the energy grid in this sector.”

Thousands of cab drivers in the capital, Lima, have already made the switch to natural gas, taking advantage of government credits to convert their engines, and the municipality is preparing to introduce a fleet of natural gas-powered buses for mass transit.

The Minster of Energy and Mines, Juan Valdivia, said he hopes to make the switch to natural gas to offset rising oil fuel prices and to reduce Peru’s vulnerability to world markets beyond its control.

“Diesel, unfortunately, is the most largely consumed fuel. That is why were are working intensely to generalize the use of natural gas,” Valdivia said, “because its price is lower than that of gasoline and diesel.”

The Camisea Gas Project, known as Block-88, is one of Latin America’s largest non-associated natural gas reserves. But, the construction and exploitation of two pipelines as well as a distribution network that would make natural gas for domestic consumption and export, has been a drawn out process, plagued by delays.

Some energy analysts have said President Garcia, and his predecessor, former President Alejandro Toledo, were too quick to cut deals to allocate up to 30 percent of Peru’s known natural gas reserves for export. That energy will be needed for domestic use in coming years, they say, to generate electricity and power water desalinization plants as Peru’s quickly melting glaciers disappear, depriving the country of drinking water and hydroelectric energy.

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