Can Ecuador meet the sky-high demand for diesel during the energy crisis? Why is it providing a subsidy?

By Liam Higgins

In 2023, about 650,000 barrels of diesel were consumed for private electricity generation, mostly by large manufacturing firms. So far in 2024, the consumption has passed three million barrels and could reach four million by the end of the year.

According to some energy experts, this massive increase is cause for alarm.

The demand for diesel-powered electric generators has skyrocketed as a result of power blackouts.

There’s no question why demand is skyrocketing: it’s the blackouts and the fact that diesel is the fuel of choice for most electric generators used by businesses and some homes. “People are doing everything they can to keep their businesses running and they need generators to do this,” says Jorge Luis Hidalgo, managing partner of GreenPower International. “Given the circumstances, the government is encouraging people to buy generators, providing them with financial incentives.”

Shipping containers are arriving daily at the port of Guayaquil, filled with generators from China and other Asian countries, Hidalgo says. “Two hundred thousand or more are coming in each week and being loaded onto trucks headed for Quito, Cuenca, Manta and other cities,” he said. “The demand is overwhelming even though the government is telling us power rationing will soon end.”

For Hildalgo and others in the energy business, the massive demand for diesel is ringing alarm bells. “First, there is the question of whether the country can import enough diesel to meet the demand,” he says. “Our two refineries do not produce diesel, so it has to be imported, which is ironic and embarrassing for a petroleum-producing country.”

In addition to the demand for power generators for business and personal use, Hildalgo says the government’s electric utilities will themselves soon be needing huge amounts of diesel. “They just contracted for two new thermal barges, and these operate on diesel. Beside these, there are the thermal plants that have been idle that will soon go back online, and the 30 or 40 small generation units being imported from the U.S., Turkey and Lebanon. Within a matter of weeks, all of these will need diesel.”

Like Hildalgo, Oswaldo Erazo, executive director of the Chamber of Petroleum Derivatives Distributors, questions whether the Energy Ministry can secure sufficient amounts of diesel to meet public and private needs. “Contracts for fuel importation are signed months, even years in advance, so there is serious concern that Ecuador, buying on an emergency basis, can obtain the product it needs. At the very least, we will be paying premium spot market price for deliveries.”

Erazo says another concern is the millions of dollars the government is paying to subsidize diesel purchases in the private market. “While subsidies for gasoline are being phased out, the subsidy for diesel remains in effect,” he says, citing political pressure from bus and trucking companies. “The import cost of diesel is $2.10 per gallon, but it sells for 92 cents on the domestic market. In other words, the government is providing a $1.18 per gallon subsidy.”

Erazo asks: “Given the economic hardship the country faces, can it afford to provide this give-away to the private market? Should it? I think it’s very difficult to justify.”