Ecuador has announced increasing its oil production to deepen its fiscal treasury thereby breaking OPEC agreement to cut crude production.
The Latin American country won’t be able to meet its commitment to lower output by 26,000 barrels a day to 522,000 a day, as agreed with OPEC last year, Oil Minister Carlos Perez said in an interview with Teleamazonas on Monday.
“There’s a need for funds for the fiscal treasury, hence we’ve taken the decision to gradually increase output,” Perez said. “What Ecuador does or doesn’t do has no major impact on OPEC output.”
Consequently in terms of size, Ecuador’s exit is more or less inconsequential when considering the size of the global oil market, as the amount it agreed to cut accounts for less than 25 seconds of daily consumption. Yet, it does create a dangerous precedent in the Organization of Petroleum Exporting Countries (OPEC), opening the door for other, perhaps bigger producers to follow suit.
Ecuador says it had a “non-written” agreement with OPEC that gave it flexibility on output because of its fiscal needs. The Vienna-based group, however, hasn’t disclosed such an accord.
Ecuador isn’t the only OPEC member struggling to bolster its finances, with others such as Nigeria and Algeria also relying heavily on petrodollar to plug fiscal deficits. Many require prices significantly higher than today’s level to balance the books.
Other small OPEC members may now argue they also need extra money, said Torbjorn Kjus, an analyst at DNB Bank ASA in Oslo.
“They should understand that this might hurt the whole deal,” he said, suggesting OPEC’s top producer Saudi Arabia could decide: “If you guys don’t want to participate then let’s just dump the oil price down into the $20s and see how funny that is.”
OPEC has for years cheated on its own agreements, particularly when oil prices fail to recover after an output cut. But Ecuador has taken the rare step of saying publicly it will increase production, making it impossible for the group to conceal the desertion.
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