Ecuador could benefit from rising oil prices but officials aren’t counting the money yet

If international oil prices continue to rise, Ecuador will be a major beneficiary. Oil prices hit the $90 per barrel mark last week and many industry analysts believe it will reach $100 before the end of the year.

Finance Ministry officials are hopeful but cautious about rising oil prices. They say they won’t count on additional revenue until it is in the bank.

“If the trend continues, the government could see a substantial windfall in 2022,” says economist Alberto Acosta. “It is too early to make changes to the budget but additional revenue could total billions of dollars by the end of the year.”

Ecuador’s 2022 budget is based on an oil price of $59.20 a barrel and the country’s Finance Ministry says it will stick to that calculation until it sees “overwhelming evidence” that higher prices are here to stay. “The oil market is influenced by a number of factors, including geopolitical situations and demand and we are being careful about jumping to conclusions regarding future developments,” says Finance Vice Minister Bernardo Orellana. “It is true we are hopeful that current trends continue but we are not adjusting our budget predictions yet.”

Another major factor influencing prices, he says, is the Covid-19 pandemic. “All indications are that the health crisis is coming to an end and if this is the case there could be a big surge of consumer demand.”

If prices remain high, Orellana says it means the country could reduce its deficit at a faster rate and accelerate some debt payments. “It is also possible we could consider increasing expenditures on other budget items and think about infrastructure projects but we not considering these possibilities at the present time.”

According to Acosta, oil revenue could increase by 30 to 40 percent this year, or even 50 percent if prices continue to rise. “Since income from oil amounts to 15 to 25 percent of Ecuador’s budget, depending on the market, there is the possibility of a huge boost in revenue. I agree with the government that we should move slowly in terms of anticipation but, on the other hand, we can’t lose sight of the potential benefit.”

Acosta points out that Ecuadorian oil does not earn top market prices. “Ours is a heavy crude that requires more refining and currently sells for $10 to $11 below what is quoted on the North Sea and Texas markets.”

Part of Orellana’s caution is based on lessons from the last oil boom. “From 2010 to 2014, when oil was above $100 a barrel, the government made the mistake of assuming high prices would continue indefinitely,” he says. “They were so confident of it that they committed to large infrastructure projects and doubled the size of the government. Even worse, they borrowed heavily, counting on future oil revenue and, as we all know, the market crashed and the country found itself in deep debt.”

He added: “We will be careful not to repeat the mistakes of the past and will certainly not count the money until it is in the bank.”