Latin Lunacy Spreads To Ecuador

From IBD:
Posted 5/17/2006

Latin America: Ecuador's government deserves all the trouble it's got coming now that it's decided expropriation is the way to get rich. But the trouble won't come from the U.S. It's headed their way from Ecuadoreans.

It's mind-boggling what Ecuador threw away Tuesday, when the government confiscated $1 billion in assets from Occidental Petroleum, the U.S.-based oil giant.

Driven by populist pressures from leftist groups, the government used a pretext of "enforcing law" to get what it wanted — the effective nationalization of Occidental's assets. Unlike the similar confiscations in Bolivia this month, this was against just one company. But its message was the same, and it won't be lost on Ecuador's few remaining foreign investors or its own private sector.

In a declining oil field, Occidental produces 100,000 barrels of Ecuadorean crude each day and does so with state-of-the-art technology and manpower that ensure nothing goes to waste.

It also pays taxes, employs Ecuadoreans, helps local communities by building schools and clinics, trains farmers, goes along with draconian environmental laws and never passes bribes.

That, however, wasn't good enough for Ecuador's disorganized, anti-U.S. government. Based on a 2004 SEC filing in which Occidental merely inquired about selling a stake to Canadian oil company EnCana (which has since fled Ecuador), Ecuador charged Oxy with not seeking supposedly necessary permission.

Oxy was also accused, without evidence, of violating production quotas and not filing reports.

Even if there were any basis to the charges, which there isn't, Ecuador's leaders went overboard and said those "crimes" deserved a billion-dollar penalty. They also sent troops in, Bolivia-style, to confiscate everything Occidental ever invested in Ecuador over decades.

On the NYSE, Oxy shares sold off 2.2% in heavy trade. That's nothing compared with the dive Ecuador is about to take.

The loss of Ecuador's hard-won free-trade pact with the U.S., something it was on the razor's edge of signing, is virtually guaranteed. Ecuador also will probably lose all practical access to U.S. markets when its 2006 Andean trade preferences expire.

Two free-trade-pact neighbors, Peru and Colombia, will gladly help themselves to Ecuador's market share in exports of flowers, shrimp and other regional specialties.

About 60% of Ecuador's economy is based on those exports, so more than half the economy stands to collapse.

What Ecuador's government has done is throw away access to a $11 trillion market in exchange for $1 billion in illegally expropriated assets from a U.S. oil company.

Blame can be laid at the feet of populist groups with no grasp of how wealth is created. In addition, local media accuse politicians of taking bribes from China and Venezuela for access to Oxy's oil fields. All oppose the free-trade pact with the U.S.

The U.S. is trying to get Ecuador to wake up. But even if the government does have a change of heart, undoing the damage will be difficult. Ecuador's constitution explicitly forbids expropriation, but the first chance Occidental will have to make its case in an Ecuadorean court won't come until December.

Occidental will also try to win back its assets in an international court. But that could take years, and the Occidental field has only about seven years of production left in it. By the time PetroEcuador — the state's inefficient oil monopoly — gets done with it, there won't be much left to salvage.

Long term, Occidental won't lose that much. The real price will be paid by the many small and midsize businesses that make up Ecuador's private sector. They need markets and unanimously want free trade. This year, tens of thousands of them took to the streets, waving the roses they export, to make that demand known.

Chambers of commerce, led by the biggest one in Quito, are uniting, and daily protests are in the works. Businesses are also ready to declare a tax strike to get the message across that any government that would destroy 60% of the economy is illegitimate.

Radical measures perhaps, and it's doubtful they'll head off the hardships coming to Ecuador as a result of the expropriations. But what else can you do when you're in a life-and-death struggle against a government so rapacious and irresponsible?