Ecuador and the tragedy of petro-dependency

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Movilizacion indigena contra el alza de los combustibles en Quito, 08-10-2019
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On October 1 the Ecuadorian government announced a series of economic measures that respond to the agreement reached last February by the government with the International Monetary Fund (IMF), according to the Minister of Economy and Finance, Richard Martinez. There are various measures, but what generated the most commotion was the elimination of fuel subsidies. There were street demonstrations, a stoppage of transport, political repression and even a declaration of a “state of emergency” that significantly limited the freedoms and rights of citizens.


This is not the first time that such a situation has occurred in Latin America. Nor is it exclusive to the region. One recalls for example the case of the yellow vests in France. But there are at least a couple of recent events that have had important opposition in the streets as a consequence, with various similarities to what is happening today in Ecuador: transport stoppages, popular demonstrations, violence in the streets, looting and police repression.


On December 26 of 2006, President Evo Morales of Bolivia decreed what, as in Ecuador, was known as the “gasolinazo,” a measure that raised the price of gasoline from 57% to 73% and diesel to 82%. The second case occurred on January 1, 2017, when the Peña Nieto government in Mexico decreed another “gasolinazo” with an increase in the taxes on fuels that provoked a rise of between 14% and 20% in the price of gasoline and 16% for diesel. In both cases the main reason for the imposition of such unpopular measures was to balance the public budget, weighted down by the transfer of resources to fuel consumption. The recent measures taken by Lenin Moreno, that raised the price of gasoline by 24% and diesel by 120%, answer to the same reasons: beyond the imposition of conditions by the IMF, these are founded in the budgetary disequilibrium of the country.


The debates with respect to this crisis are varied and the arguments in favour and against are many: the transparency of prices, external conditionalities, fiscal balances, the social costs, the right of access to energy, subsidies to popular sectors, among others. Nevertheless, in every case it is a question of managing tensions between two objectives that push in opposing directions: the balance of fiscal accounts on the one hand, and on the other the existence of a fuel cheap enough to sustain economic growth.


This is the central problem in any of the cases analysed. The political tussles can bring out different aspects, for example the occurrence of IMF conditions in the Ecuadorian case, or the bad administration of PEMEX in the Mexican case. As with every crisis, this becomes a privileged battlefield bringing to light the ideological and partisan differences among the distinct political actors to gain followers for their causes. But these are superficial elements, anecdotal or peripheral details to the central problem, which is that economic growth (and with it, the quality of life and prosperity) cannot be maintained if the prices of energy are “real”, that is to say, those that reflect the costs of production.


The Ecuadorian case


Ecuador, like Bolivia and Mexico, is a petroleum country. From the beginning of the last century, oil has been extracted for commercial ends, although it made a substantial jump in 1972 when, in a historic ceremony, the first barrel of crude arrived in Quito after a presidential speech, accompanied by a march of students and the music of military marches. Production grew until it reached 27 million tons of crude in 2018, a level of production that has remained relatively constant for least 15 years.


In order to achieve this, successive Ecuadorian governments had to move further into the Amazon forest occasioning serious environmental and social consequences. Texaco alone provoked losses that were evaluated by judicial tribunals at 18 billion dollars. But even after this bitter experience, in order to sustain these levels, oil production continued to advance on indigenous territories and places of rich bio-diversity such as the National Yasuni Park–one of the major ecological reserves in the world, where there are still peoples who have not been contacted.


Petroleum has represented about 10% of the GDP and nearly 40% of the fiscal revenue of Ecuador in recent years. Nevertheless, fuel subsidies amounted to over 50 billion dollars between 2005 and 2018, an amount equivalent to 50% of the 2018 GDP. This without counting the hidden costs derived from environmental impacts that were not accounted for. In addition to the Texaco case already mentioned, the average number of accidents per year associated with oil production between 2000 and 2010 was nearly 50, according to data of the Environment Ministry of Ecuador. In May 2013, an oil spill from the Trans-Ecuadorian Pipeline left over 11 thousand barrels of crude on the banks of the Coca river provoking an environmental disaster that reached Peruvian territory. In 2015, another study of the Environment Ministry noted 659 environmental liabilities derived from oil exploitation in the province of Sucumbios alone. These environmental costs, many of them calculable in monetary terms, are never included in the petroleum fiscal accounts.


In 2018, 11 million tons of crude oil were consumed in Ecuador (less than half of what was produced), 50% more than was consumed ten years ago. The greater part of the increase in consumption is due to the doubling of the number of automobiles from 989 thousand in 2008 to 2.2 million ten years later. Half of the oil consumed in Ecuador is destined for transport.


The background


The present crisis in Ecuador, as previously in Bolivia and Mexico, reflects the growing tension between energy needs and the supply of energy. This is something that happens not only in these countries but is a central problem for all, or almost all, the governments of the world. The economy depends on cheap fuels, particularly cheap oil. It is no accident that the transport sectors have been the first to react in Ecuador as in Bolivia and Mexico. The higher price of fuels implies an increase of all prices in the economy because transport is essential to maintain activity. From ensuring transportation of every worker to her workplace, to providing access to industrial materials for production, or to maintaining the functioning of the whole chain of distribution.


But in addition to this objective and concrete aspect of the economy, there is another subjective facet that is equally relevant. The number of private automobiles in circulation has been one of the privileged indicators of the economic prosperity of countries and the higher quality of life of their citizens. The increase in the sale of private vehicles is frequently presented as an indicator of the healthy development of countries, and attaining ownership of an automobile is a sign of the prosperity of a family.


The private automobile hence becomes a necessity because people’s economic, labour and social life has been constructed on the basis of the use of the automobile. People work far from where they live, organize their leisure activity counting on the mobility of the automobile, etc. And those who have yet to have their own private automobile, do not fail to dream of reaching this objective in the shortest time possible. Limiting the use of the automobile through the rise of fuel prices is seen as a profound deterioration of the quality of life for those who possess them and a bitter attack against the hopes of those who anxiously await their turn to enter the middle class. And the automobile is only an example, perhaps the most paradigmatic, of a quality of life that depends on an increasingly costly energy.


This is the central problem: today’s economy and the lifestyle of modern society cannot be sustained in the absence of cheap petroleum. This is evident every time international oil prices rise, for whatever reason; immediately economic growth is halted, the GDP falls and in countries with greater vulnerability to these variations, this is devastating.


If the kind of future development in Latin American countries is projected to sustain and deepen the current economic dynamic, it will be necessary to devote a large amount of fiscal resources to maintaining low fuel prices, because the cost of oil production will be ever be greater. Beyond the eventual short-term variations, the tendency will be towards increases, for the simple reason that the world’s oil reserves are increasingly more difficult to extract and process. Shale oil, ultramarine oil, extra heavy crude, etc., have a higher cost of production than those that we have benefitted from in past decades.


Consequently it is a good thing that the population is growing accustomed to the idea that to have cheap fuel means financing it through taxes that must come from somewhere. These taxes can be higher or lower from the point of view of the social distribution of the burden, but the fiscal requirements to achieve this will be higher over time. In order to maintain the dynamic of growth to feed a quality of life as it is currently understood, this price will have to be paid.


The other option is to reorient the economy in such a way that societies can be less dependent on petroleum. This will imply reordering the whole productive system, the expectations of consumption of the population and even social values. This will not be simple.


But nor will it be simple to sustain economic growth with increasing energy costs. The debate is much deeper than to discuss whether the government is more or less on the right or more or less on the left, or if the measures are more or less neo-liberal or more or less progressive. We live in a petro-dependent society in times of expensive petroleum, and to sustain or eliminate the dependency will require much effort.



(Translated for ALAI by Jordan Bishop and Joan Remple)



-Gerardo Honty is an analyst with CLAES (Centro Latino Americano de Ecología Social)
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