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Category — Latin America/South America

Petroleum Development in the Ecuadorian Amazon: Setting the Record Straight (Part III: Did International Oil Firms Despoil Eastern Ecuador’s Environment?)

[Ed. Note: This concludes Douglas Southgate's review of Ecuador’s claims of “reckless environmental damage” against Chevron, and through them international oil companies (IOCs). Part I challenged the facade that Ecuador's passive view of its own resources led to exploitation by Big Oil; Part II examined the economic benefits of fossil-fuel development in the country.

This post refutes the charge that environmental damage is the responsibility of foreign firms alone. Indeed, it is the state company, Petroecuador, that was chiefly responsible for environmental despoliation in the Amazon region. These postings are timely in light of a recent article in The New Yorker, [1] a new book about the construction of a trans-Andean pipeline, [2] and other literature in which IOCs’ actions in Ecuador are criticized.

Billions for Government, Nada Environment

Opponents of petroleum development in the Amazonian lowlands (Oriente) of eastern Ecuador maintain that damage to the region’s natural resources has been the result of IOCs’ dominance of the country. But in the first of three postings about the anti-oil campaign, I show that the Ecuadorian government actually exercised considerable power in its dealings with foreign companies. Soon after petroleum was discovered in the Oriente, Ecuadorian authorities obliged IOCs to spend tens of millions of dollars on transportation infrastructure in order to facilitate colonization, in which the firms had no real interest. [Read more →]

February 17, 2012   3 Comments

Petroleum Development in the Ecuadorian Amazon: Setting the Record Straight (Part II: Oil wealth & socioeconomic progress in Ecuador)

[Ed. Note: This series addresses key issues at the heart of Ecuador’s claims of “reckless environmental damage” against Chevron, and, through them, international oil companies (IOCs). Part I challenged the facade that Ecuador's passive view of its own resources led to exploitation by Big Oil. Part III tomorrow addresses the misperception that environmental damage in this small, South American nations is the responsibility of foreign firms alone.]

 Oil and gas has been a 40-year economic driver in Ecuador. With the national treasury benefiting from oil and gas revenue, any lack of socioeconomic progress during the last decades cannot be blamed on international oil company (IOC) profit-making there.

Indeed, no serious observer claims that Ecuador has failed to experience development. Criticism has focused instead on waste and misallocation of the large cash bounty that multinational investment created for Ecuador.

Who Got the Money?

Much of the blame for misallocation rests with the uniformed services, which have received a sizable portion of the country’s petrodollars. Military expenditures averaged 45 percent of the national budget from 1972 through 2000, which has enabled the armed forces to acquire a fleet of oil tankers, an airline, and other commercial enterprises.[1] However, oil wealth also has been spent on social services and subsidies for the public at large.

Despite waste, corruption, and misallocation, gross national income (GNI) per capita improved during this period. So did non-economic indicators of human well-being, including the infant mortality rate (IMR) and life expectancy at birth, thanks to better water supplies and public sanitation, wider access to pharmaceuticals, and, most importantly, improved nutrition.

Conditions in 1967

At the time when oil was discovered in the Oriente, mean GNI in Ecuador ($260) was barely half the Latin American and Caribbean average ($478); only in Haiti’s GNI per capita was appreciably lower. [2] The country’s standing in terms of non-economic measures was a little better. [Read more →]

February 16, 2012   No Comments

Petroleum Development in the Ecuadorian Amazon: Setting the Record Straight (Part I: Was Ecuador ever subservient to foreign oil firms?)

[Ed. Note: In this three-part series, Douglas Southgate, an economist and professor at Ohio State University, addresses key issues at the heart of Ecuador’s claims of “reckless environmental damage” against Chevron, and, through them, international oil companies (IOCs). Part II and Part III will address two other charges: that the small, South American nation has benefited little from energy-resource development, and that environmental damage is the responsibility of foreign firms alone.  These postings are timely in light of a recent article in The New Yorker,[2] a new book about the construction of a trans-Andean pipeline,[3] and other literature in which IOCs’ actions in Ecuador are criticized.]

Part I in this series challenges the charge from the Ecuadorian régime’s (and its U.S. backers) that:

(1) Ecuador was an innocent seduced by the siren song of Big Oil, and became a vassal to their interests;

(2) Ecuador’s relationship to its oil potential was merely passive; and

(3) Oil development monies did not benefit Ecuador.

In fact, the country moved aggressively to capture the lion’s share of the benefits created by private investment. Nationalization and taxation left the government with 97.3 percent, or $22.7 billion, of the monetary returns created by the concession originally developed by Texaco and Gulf between 1972 (when production and exports began) and 1992 (when the state oil company gained complete ownership of the concession).[1]

The Legal Setting

Continuing appeals of a February 2011 ruling by a district court in the Amazonian lowlands of eastern Ecuador and charges of fraud leveled against plaintiffs’ counsel [4] are recent and noteworthy developments in a legal campaign launched nearly two decades ago against Texaco, which along with Gulf Corporation began drilling for petroleum in the region during the 1960s and which has been affiliated since 2001 with Chevron. [Read more →]

February 15, 2012   3 Comments

Subsoil Oil and Gas Privatization: Private Wealth for the Common Good (Message for Latin America)

[Editor note: A profile of Guillermo "Billy" Yeatts, an Argentinean and energy expert, author, and free-market philanthropist, is at the end of this post.]

The history of oil and gas production in Latin America has been characterized by a continuing tug of war between the state as owner of the subsurface (Spanish colonial tradition) and private producers in pursuit of profits. Private participation in the industry has been limited to brief periods and restricted to specific phases of oil and gas production.

The typical pattern is that foreign oil and gas companies are allowed into a country to locate and initiate production. Once oil is flowing, governments nationalize the companies’ facilities – with or without compensation – and hand them over to government-owned and operated monopolies.

Whether the oil or gas is produced by private corporations or by a government monopoly, it is almost always the government that receives most of the profits. All too often, the money is used to keep the heads of state in power.

In the United States, by contrast, individuals own and control much of the nation’s subsurface rights to energy and other minerals. The results are starkly different. While the oil and gas industry in the United States expanded quickly, bringing prosperity to many areas that were once underdeveloped or deserted, oil revenues in other countries have propped up corrupt governments with little or no benefits to the general welfare.

State ownership of the subsurface removes incentives for risk-taking, investment, and technological innovation. Farmers and ranchers are pitted against oil development. In Latin America, the prospect of an oil or gas discovery is a farmer’s worst nightmare. They reap no financial benefit from the discovery, but they do suffer land damage and the disruption to their lives from drilling and production operations. Consequently, a landowner’s incentive is to hide any mineral wealth his property might have and to fight any attempt to exploit such wealth.

In the United States, on the other hand, landowners dream of oil being discovered on their property. If they own the mineral rights, they are compensated for the right to explore and receive a royalty for any minerals produced. This more than makes up for the inconvenience of oil and gas operations on their property.

Spread of Oil Nationalism in Latin America

Theories of political and economic nationalism espoused by Latin American intellectuals in 1920s provided the analytical framework for dissatisfaction with the distribution of wealth. Nationalists became convinced that the state had to play a major role in the operation and development of the oil and gas industry. This led to a domino strategy of government confiscations of privately owned energy facilities in both Latin America and the Middle East. [Read more →]

April 30, 2010   4 Comments