Ecuador Oil and China
Research for Online Investors

by John Dalt

9/09/11

The Energy Information Agency (EIA) estimates Ecuador’s oil production and crude oil exports at 285,000 barrels of crude oil in 2010.  As a member of OPEC, Ecuador is one of Latin America’s largest exporters of crude oil.

A growing share of Ecuador’s crude oil is going to China, even though exports to China cost more in transportation.  Why does Ecuador export to China rather than the U.S.?  China is following their preferred model of opening new markets.  Call it foreign relations, Chinese style.  Since 2009, China has promised Ecuador loans to build six hydroelectric dams, and other infrastructure projects including a refinery to produce gasoline.

China attaches strings to their “foreign aid.”  Ecuador is required to hire Chinese firms to do a share of the construction projects funded by the loans and interest and principal are paid back in crude oil shipments.  The Chinese Commercial Bank has made other loans to Ecuador in exchange for oil supply contracts.

Ecuador is following Venezuela’s lead in nationalizing oil production.  Noble Energy, Occidental Petroleum and Chevron have all had assets seized or lost legal cases that penalize them for doing business in Ecuador.  In 2010, Ecuador passed a law requiring renegotiations of existing contracts with oil exploration and production companies.  The hydrocarbons law requires “service contracts” where the foreign company only receives a set dollar amount per barrel of production.  The remainder of the revenue from the sale of production is remitted to the government.

In 2009, when China was opening their wallet to build dams and a refinery, Ecuador expelled a U.S. diplomat and rejected $340,000 in foreign aid from the U.S.  This money was for anti-drug operations.  The U.S. wanted to have input on the official in charge of the money out of concern it could be diverted or actually be used to help drug traffickers.  Ecuador termed this an insult on their integrity.

Ecuador exports 285,000 barrels of crude oil per day.

The Thunder Horse oil platform in the Gulf of Mexico produced 250,000 barrels per day in 2010.  President Obama; if you want to cut oil imports…open production in the Gulf of Mexico.  One giant oil field in the Gulf replaces one socialist country.  It is time to grant deep-water drilling permits.  If you want to lower the price of oil, grant drilling permits in Alaska.  If you want to lower unemployment, build temporary housing in Williston, N. Dakota, so oil field workers have a place to live.  Then cut off unemployment insurance with a bus ticket to Williston!

The market is down sharply today on news out of the eurozone.  Greek one-year note interest rates spiked to 98% this morning as news spread that Germany was working on plans to recapitalize their banks if Greece defaults.  As the largest eurozone economy, Germany’s banks have been large purchasers of Greek sovereign debt.  If Greece does not meet their obligations to pass austerity measures they would not qualify for new loans and would default on existing debt.

Germany’s Juergen Stark resigned from the European Central Bank (ECB) this morning.  Germany has been critical of the ECB’s bond buying program.  After a 19-week hiatus, the ECB reactivated the program with purchases of Italian and Spanish bonds last week.  Those countries interest rates were under pressure, and the ECB was active in the market to tamp down interest rates for these two countries.

Stark is the second German banker to resign from the ECB this year.  Axel Weber, Bundesbank chief quit in February. Current Bundesbank chief Jens Weidman also opposed the ECB bond buying activity last week.

Next week could see Armageddon in European markets.  How many times can the finance ministers, ECB and IMF pull a rabbit out of the hat?  The activity in markets indicates events are moving too fast for politicians to contain them.  This is exactly how it will happen when the bond vigilantes question the ability of the U.S. to repay its debts.

Ben Bernanke and for that matter Warren Buffett are correct.  The U.S. is an excellent credit risk if, IF you don’t mind being paid back in a currency that is worth less than the currency you lent the treasury.

The big lie of being able to print money equals credit worthiness will be tested on this side of the Atlantic sooner than we think.  It is the nature of Mother Nature, and capitalism, to prey on the weakest.  We saw it in the credit crisis of 2008 as the weakest banks failed first, and then the short sellers went to the next one.

How many countries will fall before investors turn their backs on U.S. debt?  Greek Debt to GDP is 143%, Italy’s Debt to GDP is 110%, the U.S. is 100%, Portugal’s 81% and Spanish Debt to GDP is 64%.  Current debt for the U.S. does not include the unfunded entitlement program expenses that are calculated at over 300% of GDP.  The U.S. is the largest debtor nation in the history of the world.

Quote:  All this reminds one of the autumn of 2008--- Deutsche Bank CEO Josef Ackerman

Mailbag:
Great answer on why we shouldn’t succumb to the populist attacks on the wealthy.---Long-Term subscriber R.H.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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