Decline in international oil prices will affect the national budget but will not hurt Ecuador’s citizens, Correa says

Oct 19, 2014

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President Correa

Ecuador says it is prepared for the recent drop in international oil prices.

In his weekly television broadcast on Saturday, President Rafael Correa said the government is prepared to adjust the national budget to reflect lower income from oil sales. “We have contingency plans to deal with this,” Correa said. “There will be some effect on our programs but the progress we have achieved in recent years of improving lives of Ecuadorians will continue.”

Oil represents more than half of Ecuador’s exports, $9.7 billion in 2013 of a total of $18 billion.

Oil prices dropped to as low as $82 a barrel last week in international markets, down from $107 in June. Most experts see a continued decline in the near future. Economic analyst Andres Vergara sees prices bottoming out at $75 or $76 a barrel.
According to Ramiro Crespo of Analytica Investments, the price drop is due to an over-supply of oil, partly the result of increased production from shale deposits in the U.S. Crespo notes that the U.S. has overtaken Saudi Arabia as the world’s top producer, a fact that weakens the market clout of OPEC, the oil cartel that Ecuador belongs to.

Correa said the government is lowering projections of oil income in 2015, expecting an average price in the $80 to $84 dollar a barrel range. “Although I think there will be lower prices in the short term, we expect they will increase in the future,” he said. “Of course, lower prices means less income and we will make adjustments for this that will not harm our people. It could mean we will build 100 new schools next year instead of 200.”

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Correa said the government is considering a “small increase” in several taxes, including the VAT, Special Consumption (luxury) Tax and the income tax.

Opposition leaders say that Correa is putting a “good news spin” on the situation. “I think the spending cuts will need be much bigger and will affect everyone,” says Roberto Ruiz, a political consultant in Quito. “Not only will lower prices affect the budget but they mean will need to deliver more oil to China to pay off our debts.”

In addition to higher production from the U.S., experts say that oil consumption in developed countries has declined. Luis Calero, former OPEC official. “I see the price settling to about $80 for several months and this will have an impact on the budgets of many oil producing countries, including Ecuador,” he says.

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