Ecuador: Oil, Investment and the Amazon

The decision to auction of exploration blocks in Ecuador’s southern Amazon, while extremely controversial from an environmental and social justice perspective, illustrates a sober assessment of Ecuador’s short-term economic needs by Correa. During the early part of his presidency, Correa acted aggressively against foreign oil companies, pursuing Texaco and Chevron officials for environmental damage in the Amazon, raising taxes and royalty fees and taking control of Occidental Petroleum’s operations in Ecuador. While politically popular, and producing a brief windfall of additional revenues for the government, these moves also discouraged investment in the country, particularly in the vital oil sector. Oil production peaked in 2006, a year before Correa took office, and then fell by 9.4 percent over the first three years of his presidency. As the government depends heavily on oil to finance its budget and aggressive anti-poverty programs, maintaining or increasing production is very important. In this context, the auction serves two purposes: one is directly increasing investment in the oil sector to increase production while the other is signaling, in a way similar to the talks with the EU, that Ecuador is open to investment from private companies, in the oil sector and the broader economy.

Strictly looking at the move from the perspective of the oil sector, the decision to allow for oil exploration seems perhaps more cynical than pragmatic. As environmental and human rights groups opposed to oil exploitation in the region have pointed out, the areas in question seem unlikely to produce significant amounts of oil—perhaps as few as one in three wells will even produce—especially considering the effect it would have on the local communities and the forest’s ecosystem. It seems likely that the direct economic benefit from whatever oil can be extracted from those blocks is a secondary factor in the decision (though debts owed to China may also play a role). For a president who has made a point of appealing to indigenous groups and who presided over the framing of a constitution that has significant environmental protections built in, a relatively small increase in oil revenues hardly seems worth it.

However, when viewed as part of a broader economic strategy, the move makes much more sense. As previously mentioned, the Ecuadorian government likely squeezed foreign oil companies too hard at the beginning of his presidency, and production suffered as a result. Moreover, whatever oil will be extracted from the blocks up for auction will require a high degree of technical competency; the kind state owned oil companies—like Petroecuador—typically lack. In this context, it’s perfectly logical for Correa to pursue oil exploration, and to allow foreign companies to do it. In doing it this way, Correa has maximized his chances of the explorations blocks yielding real results—and the revenues that follow—while also extending an olive branch to foreign investors everywhere. It may not work, but it maximizes the extraction potential of the region while indicating that Ecuador trusts foreign investment, even in the oil sector, even in the most important ecosystem in the world, which also happens to enjoy constitutionally guaranteed protections.

Looked at holistically, there are some significant downsides to this sort of move, but from a purely economic position, the benefits—both political and economic—seem likely to outweigh those negatives for Correa.

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