Algeria, Ecuador, and OPEC

Algeria and Ecuador – OPEC Membership Motivation

Following the Baghdad Conference in September 1960, the governments of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela came together to form the Organization of Petroleum Exporting Countries (OPEC). In 1969, Algeria joined the organization, a move made after OPEC had spelled out a “more ambitious oil policy.”^[1] In turn, Algeria has remained a member of OPEC to this day. Conversely, though Ecuador joined the organization only a short time later in 1973. it left the organization in 1992, only to rejoin in 2007. In recent years, Ecuadorian officials have clashed with OPEC on production quotas, with the recent oil glut being a major driver.^[2] On the other hand, both Algeria and Ecuador rank among OPEC’s lowest producers of oil. The focus of our blog will be a critical examination of Algeria and Ecuador’s motivations for OPEC membership;  specifically, we will examine why Ecuador departed and returned while Algeria has remained a member since joining over forty years ago.

Background

Although both Algeria and Ecuador have relatively low oil-production compared to their OPEC counterparts, they differ both geographically and demographically. Algeria is almost nine times larger in area than Ecuador, but Algeria has only twice the population of the much smaller country.^[3] Algeria is also an overwhelmingly Muslim state of Arabic speakers, while Ecuador is predominantly a Christian, Spanish-speaking state. On the other hand, Algeria and Ecuador are both presidential republics, although each has struggled with questions of whether their leadership is truly democratic.^[4]

Algeria and Ecuador are most similar in their over-dependence on hydrocarbon reserves, with Ecuador drawing more than half of its export earnings from oil and Algeria drawing almost 95% of its export earnings from oil and natural gas.^[5] Along the same lines, both have failed to diversify their economy, leading to an overreliance on oil reserves for government spending. In turn, these dependencies forced both states to cut social services when oil prices have dropped. Although Algeria and Ecuador have similar levels of GDP per capita ($14,500 and $11,300 respectively), their governments differ drastically in their levels of financial stability.^[6] Whereas hand Algeria amassed large foreign currency reserves by tapping its hydrocarbon reserves, Ecuador has struggled with large amounts of external debt.

Why Ecuador Exited

Ecuador’s exit in 1992 was the first in OPEC’s history, but it was not altogether surprising; instead, economic and political conditions within Ecuador precipitated its exit. An oil glut that began in the 1980s caused a severe economic decline within Ecuador that sank government revenues.^[7] Additionally, in 1987, an earthquake that damaged major oil pipelines caused Ecuador’s president, Leon Cordero, to suspend interest payments on the state’s $8.3 billion dollar foreign debt.^[8] Leading up to 1992, Ecuador clashed with OPEC over its production quotas amid a period of low oil prices, thereby solidifying this increasingly contentious relationship. Upon announcing its exit in September of 1992, Ecuador’s new president, Sixto Duran-Ballen, blamed the $2 million dollar membership fee and the cartel’s refusal to lift Ecuador’s production quotas for the exit.^[9]

Their motivations for leaving OPEC were simple; the organization had become a barrier to the economy that Ecuador’s new political leadership wanted to remove. Unlike Indonesia, Ecuador’s leadership plainly stated their qualms with the cartel. Ecuador felt that it had lost control over the main component of its export market, oil. OPEC-imposed quotas had forced them to limit production of oil that its leadership wanted to expand. Furthermore, they were paying roughly $2 million for a situation they were unhappy with. Thus, with the election of a new president, the opportunity and motives came together for Ecuador’s exit from OPEC. In this way, Ecuador’s motivations for exiting mirrored that of Gabon and later Indonesia. For these countries, paying fees to an organization over which they had little control was no longer politically expedient. However, Ecuador maintained contact with OPEC as an “associate,”^[10] an important distinction as Ecuador left the door open for future engagement and potential re-engagement with OPEC.

Ecuador’s Reentry

Although Ecuador was the first OPEC member to leave the cartel, it was also the first to reenter the group, thanks in part to its continued engagement with OPEC. Similar to its exit, Ecuador’s reentry was a result of economic and political conditions, both within Ecuador and internationally. Beginning in 2002, oil prices climbed steeply, quadrupling in price to $100 a barrel in 2007.^[11] As a result, Ecuador had a great deal to gain from rejoining OPEC, namely greater influence over production decisions and attempts to control oil prices. Within Ecuador, domestic politics also played a role. Ecuador’s then-president, Rafael Correa, had made pursuing OPEC membership an important component of his foreign-policy plan. At the same time, Correa was also making strong moves to further nationalize Ecuador’s supply of oil. As Reuters reported, there were concerns that Correa “might take away all the extra profit foreign oil companies have been raking in as a result of surging prices [in 2007].”^[12] This aggressive maneuvering within Ecuador went hand-in-hand with seeking more influence of global oil prices. Accordingly, if Ecuador sought to control more of its own oil, it would be in its best interests to raise global oil prices as well.

Algeria within OPEC

In stark contrast with Ecuador, Algeria’s membership in OPEC has been relatively stable. There are several ways to explain Algeria’s stability in OPEC, namely strict state-control of oil and a series of authoritarian regimes. Algeria also produces large amounts of natural gas, creating a stabilizing effect in times of unpredictable oil prices. Furthermore, Algeria nationalized its oil supply in 1971, at first seizing a 51% stake of French companies and later 100% of other companies.^[13] In controlling this supply, Algeria has been able to amass large reserves of foreign currency that, in turn, have enabled them to weather periods of low oil prices. Since joining OPEC in 1969, Algeria has been under the control of a series of authoritarian regimes, except for a brief period of civil war in the 1990s.^[14] This strict political control has meant that OPEC membership has not become a politicized issue in Algeria as it was in Ecuador. Moreover, Algeria also exerts more political control within OPEC, working closely with other OPEC producers in a recent deal.^[15] In addition, though Algeria produces relatively less oil than most other OPEC producers do, it is also the world’s sixth largest exporter of natural gas.^[16] Thus, in spite of the highly coupled nature of oil and natural gas prices, Algeria was able to reap additional profits that Ecuador had not, leading to greater stability within OPEC.  

Contrasting Algeria and Ecuador

While Algeria and Ecuador share similarities as OPEC’s lowest producers of oil, their differences highlight membership motivations within OPEC. In leaving OPEC, Ecuador expressed its frustrations with the cartel’s inability to maintain consistently high oil prices that Ecuador’s economy relied upon. The question for Ecuador was simple, why maintain OPEC membership, at a cost of $2 million a year, when the organization does nothing to control prices? Thus, for Ecuador in 1992, the costs of maintaining membership in OPEC began to outweigh its benefits as an ‘honor society’. For Algeria, on the other hand, long-term benefits in OPEC outweighed problems with the cartel. In this way, the utility of OPEC as an honor society is demonstrated; Algeria’s membership benefits are a seat at the negotiating table and a certain amount of influence as a member. Ecuador’s reentry in 2007 demonstrates how changing conditions can influence membership in OPEC. Similarly, an honor society may see rises and declines in its membership in correspondence to its level of importance or connections it can yield on the job market.

Conclusion

Although OPEC’s importance on the global stage has fluctuated over time, it remains a central force in controlling nearly half of the world’s oil. Although it does not always exercise control, the very idea of membership is enough to compel states to continue or rejoin as members. Similarly, membership in honor societies is not necessarily reflective of tangible benefits one might receive as a member. Instead, it is the unmentioned benefits (prestige, networking opportunities, etc.) that lead to membership in honor societies. In most cases, students undergo a cost benefit analysis to decide if membership is worth the cost. For Algeria and Ecuador, membership in OPEC, as of late, had been worth the fees to join. Namely, they enjoy the prestige of membership as well as tangible benefits like a voice in negotiations.