Instability Adds Up

With protests that virtually halted oil production in this country now quelled, Ecuador’s government took grim stock Tuesday of a week’s worth of damage that unsettled the oil markets, and began the demanding task of getting production levels back to normal. The threat of more protests has only added to more uncertainty in this country, whose $30-billion-a-year economy depends on oil for 40 percent of export earnings and a third of tax revenue. Oil companies have long complained about rampant corruption, the propensity of the Energy Ministry to alter contracts, and chronic political instability. Three presidents have been ousted in the last eight years. “This is an extremely dysfunctional place,” an executive of a foreign company said.—New York Times, August 24. So who cares about Ecuador?

It is, after all, only the fifth-largest oil producer in Latin America, behind Venezuela, Brazil, Argentina and Columbia.

Total production from pristine jungle lands occupied by natives who’ve been treated about as fairly as native Americans back in the 1800’s—while meaningful enough to Ecuador to cause government instability and political protests—amounts to all of half a million barrels a day.

That’s barely a drop in the 84 million barrel a day world oil habit.

And while Ecuador does send half its production to the refinery complexes of the United States, Ecuadorian light sweet crude amounts to only about 2% of our total crude oil imports.

The reason to care is that it’s not just inside Ecuador that this battle of “with, without” (to quote Pink Floyd) is taking place.

There’s Nigeria (10% of U.S. crude oil imports), which is run by a “former military ruler” who was about as “freely elected” as Saddam Hussein back in his glory days of winning 99.9% of the Iraqi vote; along with a whole lot of corrupt government officials each with their hand in the till.

There’s Iraq (5% of U.S. crude oil imports), where things aren’t exactly settled yet.

And then there’s Venezuela (11% of U.S. crude oil imports), which is run by a certifiable Castro-style socialist and a whole lot more corrupt government officials than even Nigeria can come up with.

In July, for example, Venezuela “tax auditors” raided Chevron offices in Maracaibo, seizing boxes of records “to build a case that Chevron and other energy companies owe Venezuela $3 billion in back taxes,” according to Bloomberg. “The raid is part of President Hugo Chavez’s push to squeeze more money out of foreign oil companies…”

Add them all up—Venezuela, Nigeria, Iraq and Ecuador—and you’ll find that more than 25% of daily U.S. oil imports come from countries which are, as the man said, “extremely disfunctional.”

And I’m not even counting Mexico (15% of U.S. crude oil imports), whose corruption and bureaucracy have stifled the state-run oil company’s exploration efforts to the point where Mexico is now an importer of natural gas from the United States.

For those of you not familiar with the history of U.S. energy relations with Mexico and our dependence on that country’s rich offshore fields for our oil and gas needs…well, let’s just say that this development is about as shocking as if we learned that an OPEC member country (OPEC stands for “Organization of Petroleum Exporting Countries”) such as Indonesia had become a net importer of oil.

Oh, wait. I forgot. Indonesia has become a net importer of oil.

Instability adds up. Let’s hope the math doesn’t get out of hand.

Jeff Matthews I Am Not Making This Up The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.