UNIVERSITY OF LONDON

INSTITUTE OF LATIN A M E R I C A N STUDIES

WORKING PAPERS

Oil and Politics

in Ecuador
1972-1976

George Philip
Oil and Politics in Ecuador
1972-1976

by George Philip

Lecturer in Latin American Politics

jointly at the London School of Economics
and the Institute of Latin American Studies.

University of London
Institute of Latin American Studies
31 Tavistock Square, London WC1H 9HA
ISBN O 901145 34 3

ISSN 0142-1875
 FOREWORD

The present work inaugurates a new series of publications by the

Institute of Latin American Studies, taking its place alongside

the Monograph Series, Information Pamphlets and other publications

which have been in existence for some time. The object of the

Working Papers is to preserve and present the results of research

while it is still in progress, and to invite discussion among

interested scholars from which the author can benefit. Research

projects are developed at the Institute by its own staff and

teachers, by research fellows and visiting scholars, by colleagues

in the Schools and Colleges of the University, and by other

scholars associated with our programme. These are the groups

who have provided the stimulus for the new series, and it is from

them that the authors of the papers will normally be drawn.

The object of research is frustrated if it cannot find an outlet

in publication; once published it can be improved by the

responses of others. The Institute hopes that the Working

Papers will help to satisfy these objectives and to promote the

advancement of knowledge.

J. Lynch
 1
OIL AND POLITICS IN ECUADOR, 1972-6

When Washington launched its anti-OPEC offensive in 1974?

it met resistance from an unexpected quarter. It was not
surprising that in June 1974 the President of OPEC should
assert that

certain private companies, the international consortia

and even the governments of the great economic powers,
are uniting their strength in order to fight this
organisation and bring about its destruction. But
OPEC has known how to resist, despite the different
forms of imperialist pressures such as diplomatic and
economic boycotts, because OPEC's cause is that of
the great majority of mankind - long exploited by the
exploiters of every epoch.2

What was surprising was the identity of the speaker - he was

Captain Jarrin Ampudia, Ecuador's Minister of Natural Resources.

Ecuador had only begun serious oil production in 1972 and

its export capacity was barely 2% of that of Saudi Arabia.
Nevertheless, the impact of oil was sufficient to bring about
major changes in Ecuador's domestic and international outlook.
It temporarily loosened the political boundaries of a backward
Latin American country and paved the way for new men with new
ideologies to take power and begin a major transformation of
Ecuador; although more conservative influences were able to
recover their position, they did not altogether succeed in
reversing the changes that had been made.

The key figure in these developments was Captain (later

Admiral) Jarrin, who became Minister of Natural Resources in
February 1972 and later President of OPEC. After his dismissal
in October 1974, he became a symbol of Ecuadorian nationalism
with both firm friends and very bitter enemies. In a sense,
Jarrin follows an older tradition of Latin American military
nationalism which can be traced back to Horta Barbosa of Brazil
and even Mosconi of Argentina . In another way, he shares the
"Third World" consciousness of t h e l i t e s of many underdeveloped
countries which has been able to assert itself only under the
right material conditions. If Jarrin's outlook was deeply
rooted in history, however, so was that of his conservative
opponents, who willingly reflected Ecuador's own political
conditions - personalist and weak government, a psychology of
dependency and close connection with Washington.
 As we shall see, therefore, the "dependency" writers have
accurately predicted the nature of political conservatism in
Ecuador; during this period, a powerful foreign government and
its domestic allies combined against a radical threat in order to
suppress its most dangerous manifestations. During the crisis
years of 1973-4? Ecuadorian sovereignty counted for very little.
More surprising, however (at least in terms of this paradigm),
was the emergence of a radical threat to the status quo not from
the "broad popular masses", but from a military radical who in
broad political terms was almost isolated but who was never-
theless capable of mounting a formidable challenge to the
existing order. This challenge, and its outcome, are the
subject of this paper.

Ecuador in 1972

When the military took power in February 1972, it found an

oil industry which was economically quite well developed, but
which remained a mystery to nearly all Ecuadorians. Ecuador had
been a producer of oil since 1918 (although its coastal fields
had always been small and were now almost depleted) but succes-
sive regimes had hardly concerned themselves at all with oil
policy and for many years Ecuador levied few taxes, had no state
company and knew extremely little about the industry. In 1967,
however, a major discovery had been made in the Oriente, and was
followed by a string of finds both there and offshore. By 1972,
an independent survey carried out by Rudolf Martin and Associates
put the reserves discovered by the main exploring company - the
Texas/Gulf consortium - at 3,200 million barrels (proved and
probable) adding that "Texas-Gulf have some twenty promising
structures which have not yet been drilled". A trans-Andean
pipeline was under construction and due for completion in June
1972 with an initial, capacity of 250,000b/d; expansion to
400,000b/d, or perhaps even more, was very much in prospect.

The prospect of production on this scale had already brought

some changes. There had been a major renegotiation of the
a n e w
original concession terms in 1969* non-retroactive
oil law (the first since 1937) was introduced in September 1971.
The 1969 negotiations had pushed expected government revenue up
to reasonable levels in the short run but still left a great deal
unclear or unsatisfactory. Overall, the question of government
control had not really been tackled at all. Ecuador had no
state oil refinery or even a firm contract to build one, although
the matter had been under discussion at least since 1 9 6 6 .
Moreover, although the 1971 law had set up a state company
- Cepe - the legal terms of the creation were so unsatisfactory
that Cepe had to be re-established in 1972. The question of
acreage was also important; Texas/Gulf's concession area
amounted in 1972 to 400,000 acres (which represented a substan-
tial reduction from its pre-1969 level) and other companies had
concessions covering much of the rest of the potential oil-
bearing area. Apart from the question of size, there was also
the fact that at least one (offshore) concession had been granted
under very doubtful circumstances - a matter which would later
become important. Finally, there was the question of admin-
istration itself; there was still much validity in the
government's own complaint made in 1966 that "the state does not
dispose of sufficient personnel to be able to carry out satis-
factorily the administration, control and regulation of all
aspects of the oil industry".6

This lack of oil policy reflected the weakness and backward-

ness of the Ecuadorian state itself. This was not yet capable
of producing reliable statistics on its own activities, let alone
carrying out coherent policy. As the World Bank remarked,

different conditions and developments in these two

major regions [Quito and Guayaquil] have over time
deepened social and economic imbalances and prevented
the emergence of a strong central administration.
As a consequence, political power has remained
fragmented into multiple decision-making centres - at
the national, regional and local levels - including
a multitude of autonomous and semi-autonomous
agencies, each of them receiving earmarked tax
revenue.'

Indeed, in 1970? the goverment had already decided to earmark 50%

of the royalties from the Texas/Gulf concession area to the
Armed Forces and 50% to the electricity company - Inicel.

This situation, however, did not relate simply to economic

backwardness. The economy had grown rapidly in the years since
1948, with the main growth point being the banana-exporting
haciendas of the coast where a conservative, but modernising,
'oligarchy' had grown up; during this period, there had also
been a certain amount of industrialisation. Nevertheless, in
1972, most manufacturing was still small scale and artisan and
even the larger companies were relatively inefficient, as well as
being capital-intensive and highly concentrated both by ownership
and location (since they were predominantly based in Quito or
Guayaquil). This pattern had led to an "extremely unequal"
distribution of income which was aggravated by the familiar
problems of un- and underemployment.9

The urbanisation, which took place along with industrialisa-

tion, did have some effect on Ecuadorian politics. The voting
population expanded from under 3 0 0 , 0 0 0 in 1948 to 8 2 7 , 0 0 0 in 1 9 6 8
(out of a total adult population of around 2 million). The
impact of this change was limited, however, by the chronic
weakness of Ecuador's political institutions; fragmented and
disorganised populist parties merely replaced the older
fragmented and disorganised conservative groups. If anything,
postwar economic growth made politics even less important than
formerly. As Fitch pointed out,

the new economic prosperity promoted a substantial

lessening of tensions between the coastal oligarchy,
the traditional landowning aristocracy of the sierra,
and the increasingly numerous members of the urban
middle class. With the increased opportunities for
elite mobility outside of the political system and
the rapid increase in the number of middle class
bureaucratic positions resulting from the doubling
of public expenditures, control over the government
ceased to be a highly salient issue. 1 0

Bouts of serious instability coincided with periodic difficulties

in the export markets, but these did not lead to any major change
in successive civilian governments' basically conservative
approach. In good times, change was not necessary; in bad
times it did not seem possible.
Under these circumstances, one might have expected the
military to play a "modernising" role, and there were certainly
tendencies in this direction. However, there had long been one
major factor operating against this. Ecuador's military defeat
by Peru in 1941 had been attributed by its army to the politicisa-
tion of the officer corps, and, following this defeat, there
developed a strong "constitutionalist" mentality within it.11
Over time, however, post-war influences, such as the spreading
Latin American military ideology of counter-insurgency and its
emphasis on the need for economic development, had come to
influence army officers in a different direction. Partly for
this reason, but also motivated by fear of "Communism" and
disgust at civilian politicians, the military did intervene in
1963 and moved in a vaguely reformist direction (putting an
Agrarian Reform Law on the statute book in 1964-). However, the
military government had no taste for the politics of mobilisation
or confrontation and allowed itself to be driven from office in
1966 by the determined opposition of the Guayaquil merchants
who were able to manipulate both currency transactions and press
comments in order to whip up an atmosphere of crisis. Despite
this setback, however, the army retained a group of "develop-
mentalist" officers and these, further encouraged by the Peruvian
example, later played their part in again stimulating military
intervention.

In the years after 1966, however, the most important changes

were taking place within the navy. It is likely that the
immediate impetus to radicalisation here was the "Tuna War",
fought by the navy against those American fishing boats which,
with backing from Washington, entered Ecuador's declared 200-
mile offshore limits. This "war", waged intermittently for a
number of years, gradually escalated and

suddenly became a major international incident in

January 1971 with the detention of nine US tuna-
ships, including the largest in the world, the
"Apollo", for fishing only sixty-three miles off
the coast. In mid-January, the US Congress
reciprocated by applying sanctions which included
the suspension of all aid, credits and guarantees.
Despite strong pressure, the Ecuadorian government
did not flinch and responded by imposing fines or
confiscating the catches of detained ships and by
ejecting the U.S. military mission.12

As we shall see, oil as well as tuna fish had an impact on the

navy.

The Military Government of 1972

These changes within the military were catalysed by the

prospect of oil. Few doubted that, when the oil began to flow
in June 1972, there would be important changes in Ecuador, and
this general sense of anticipation no doubt encouraged the
military to take power directly. The February coup was actually
precipitated by the efforts of civilian President Velasco Ibarra
to use the military to block the probable electoral victory in
June 1972 of his populist rival Assad B u c a r a m . ^ Velasco f s
tactics misfired, however, and the military took power in its own
name. Indeed, for a number of officers the motives for the
coup were not purely negative; rather, they themselves hoped
to take the initiative in using the oil wealth to transform
the Ecuadorian economy and modernise its society. One of the
most radical of these officers was Captain Jarrin.

Although appointed to the Ministry of Natural Resources,

Jarrin was not an oil man. He had expected to become Minister
of Education, but was given this more influential position after
two more senior and conservative Naval officers had been vetoed
by the Army. He was a military intellectual, and had been head
of the Naval academy where he had propounded a radical form of
the "national security" ideology. Moreover, Jarrin was a
determined nationalist who had been influenced by the creation
of Petrobras in Brazil, and who immediately conceived a strategy
of gradual oil nationalisation in Ecuador.

To this end, he quickly collected together a team of oil

nationalists, which included both Ecuadorians and foreigners with
experience of the industry.12 Organisationally, this group
worked together very well indeed; the World Bank later referred
to "a group of highly motivated and dedicated professionals, both
at the Ministry of Natural Resources and the national oil company.
Indeed, the improvement in the public management of petroleum
resources has been r e m a r k a b l e " . W i t h i n the team, there was no
doubt of Jarrin's personal ascendancy; one of his aides later
recalled that "for the first few weeks he took our advice, but
after that he took c h a r g e " . ^

Jarrin's position within the incoming government, however,

was more difficult. There were some factors which worked in his
favour. For one thing, the general orientation of the regime
was nationalist; Rodriguez Lara had no wish to repeat the
experience of his military predecessor who in 1963 had been
severely criticised as an entreguista for coming to an understand-
ing with the US over fishing limits. Moreover, many officers
had been influenced by Peru and, in any case, once the military
had taken power away from conservative civilians, they needed a
rationale for continuing to hold it. The fishing "war" itself
had strongly implanted nationalist values' within the navy where
Jarrin's policies were enthusiastically supported by the senior
Navy Minister, Admiral Sergio Vasquez Pacheco. In any case, the
overall climate in 1972 seemed ripe for a policy of oil nation-
alism; the oil had, after all, already been found and the
foreign investment had already been committed, so that the
bargaining advantage now lay with the host government. Moreover,
the international climate of the period was extremely favourable
to host governments, as was being amply demonstrated by the
governments of Venezuela and a number of countries in the Middle
East. Finally, in a country with so little technical expertise
in oil as Ecuador, the calibre and expertise of Jarrin's team
went a long way towards neutralising any neoliberal criticisms
that his opponents might make.

Against these advantages, however, there were serious

potential weaknesses in Jarrin's position. The greatest of
these was Jarrin's own lack of a political base. To some extent,
this was the result of his own choice - both because he was a
military elitist who showed very little interest in attracting
civilian support or even in cultivating a strong personalist
image, and because he sought protection against attack by
ensuring that all of his proposals were fully discussed within
the government and within the military before they were implement-
ed. However, there was also the fact that Jarrin was a Naval
officer and so could not rely on strong personal loyalties
within the Army, which was after all the most powerful of the
services. Indeed, given the Army's power but its essential
lack of cohesiveness, Jarrin was forced to build his house upon
sand; it could survive the clear weather of 1972-3, but was
swept away in the storms of 1974.
 From the beginning, however, Jarrin was determined to press
ahead on a variety of fronts. 1 7 Of these, one of the more
important was connected with the offshore concessions. Here
Jarrin was not a prime mover, but nevertheless came to be
associated with the policies of the rest of the government, which
consisted of a clamp-down on those suspected of "irregularities"
in the acquiring of concessions. The real motivating force
behind this campaign was a book written by J. Galarza (El Festin
de Petroleo) which was the "first best-seller in Ecuadorian
history" and which made blanket accusations against practically
everybody who had ever dealt with the industry. In particular,
Galarza attacked the granting of a concession to ADA in 1 9 6 8 .
This was issued by the Arosemena Gomez government against the
advice of its technical experts to six unknown Ecuadorians and
was transferred six days later to an American consortium.
Galarza ! s accusations greatly increased in credibility in May
1972 after a televised meeting between Galarza and Rene Bucaram,
formerly asesor of petroleum of the Ministry of Mines and
subsequently a Texaco executive. Bucaram declared that he had
himself opposed the granting of the ADA concession, on the
grounds that the ostensible applicants lacked the capacity to
undertake the necessary work. His decision had then been over-
ruled from above despite the fact that the Industry Minister was
out of the country at the time. Moreover, only 200 copies were
issued of the official gazette which contained news of the
contract. Although the issuing of the ADA concession was not
particularly remarkable in the context of pre-1972 policy-making,
the publicity which it attracted was such that the ADA concession
was cancelled in November 1972 and a number of those connected
with issuing it were temporarily placed under arrest.

The most important aspect of oil policy, however, concerned

relations with Texas/Gulf and the smaller companies of the
Oriente. The first major step taken by the government was the
issuing of Decree 43O (12th June 1972) which stipulated that
those who had obtained concessions before 1971 would have to
renegotiate them to take account of the 1971 law. This decision
was not taken easily; according to one source,18 Jarrin was
close to resignation before his proposals were finally accepted.
Years later, Jarrin recalled that his opponents

were those who were willing to allow the disappearance

of the last trace of the 1971 Hydrocarbons Law, by not
applying it until the year 2016, by which time all
concessions would have returned to the state and there
would not have been a drop of oil remaining in the
Ecuadorian Oriente.19

The main concern of the government was to recover acreage

rather than revenue, and the first consequence of the new decree
was a conflict with Minas y Petroleos. Minas was the first
Oriente concession of the period, having been granted in 1961 to
an Austrian geologist named Harold Strouth. The original
concession made up million hectares and in August 1962 Strouth
received permission to bring in other (foreign) investors. In
1964, a large part of the concession was sublet to Texas/Gulf in
return for a 2% royalty (upon which Jarrin in 1972 imposed an 86%
tax). Subsequently, Strouth sold his share in Minas to an
American consortium which included Aminoil, Amerada Hess,
Hamilton Bros, and Kirby Petroleum. This consortium began work
in the area (it later claimed that its investment totalled
US $l8m.) and was prepared to continue developing its finds.
The position changed abruptly, however, with the passage of
Decree 430 which forced Minas to cede a portion of its territory
and to accept considerably higher surface taxes.

Thus, on November 20th, the New York Times carried an

article on Ecuador which was clearly inspired by an oil company.
It quoted an oil executive as saying that "we are trapped in a
line of fire between the two big political factions in Ecuador;
the Army and the Navy. The Army promised us protection but the
radical Navy boys won the first battle to get rid of us". The
article added that "a month after oil production began, the
Minister of Natural Resources, Navy Captain Gustavo Jarrin
Ampudia began to pressurise those companies still in the explora-
tion phase, ordering an increase in the payment of concession
dues. President Rodriguez suspended the order." This hint of
Army-Navy divergence clearly embarrassed President Rodriguez more
than Jarrin who, after all, was only implementing the law and
whose position was now strengthened by this clumsy assault.
Thus Jarrin almost immediately replied to the article by accusing
Harold Strouth of talking to the press and claiming that
Minas was simply refusing to obey the law. There followed a
lively polemic between Jarrin and company spokesmen (who claimed
that Strouth no longer had anything to do with the company)
before the concession was eventually cancelled in early 1973-

The main concern of policy, however, was the renegotiation

of the contract with Texas/Gulf. The main issue involved was
that of the amount of acreage which the consortium was to return,
although domestic price levels, and Jarrin's concern to give Cepe
a share in the consortium, were also important. Texas/Gulf
tried to offer increased production as a bargaining counter
against the government's demands, and the company even hinted
that reserves might justify a second trans-Andean pipeline if
the terms were r i g h t . M o r e o v e r , the consortium claimed that
it had worked its entire concession area and initially asked
US $70m. as compensation for its returned acreage. However,
despite their apparently strong position, the companies had
little to offer Jarrin. He had no fear of prolonged negotiations
and the consortium's offer of higher output was of no interest.
Jarrin had always aimed at long-term nationalisation, and his
immediate aim was therefore to rescue as much as possible from
the hands of the companies in order to entrust it to Cepe for
development in the longer-term. For this reason, he had made no
concession to Minas y Petr&leos (which could apparently count on
a sympathetic hearing from other parts of the government - at
least until the New York Times article) and had no reason to make
any to Texas/Gulf. Moreover, Jarrin was a conservationist;
perhaps influenced by Venezuela, he believed, in 1972, that oil
prices would continue to rise and that oil left in the ground
would therefore appreciate. Jarrin wanted to develop Ecuador by
exporting less oil, but over a longer period and at a much higher
price. Moreover, even apart from his price expectations, Jarrin
was willing to hold back output out of a fear of the domestic
consequences of an uncontrollable flood of oil wealth; he wanted
to spin out developments more gradually.

Others, however, were less patient. It is not clear

whether consortium spokesmen quietly tried to put over their
views to the more conservative Ecuadorians (although it would be
surprising if they had not), but certainly there were those who
wanted a rapid build-up of production and who were worried by the
seemingly endless series of disputes taking place between the
government and Ada, Minas y Petr&leos, Texas/Gulf, etc. Indeed,
the conservative press kept up a line of criticism against Jarrin
for taking too hard a line with Texas/Gulf and the other
companies - particularly when a number of smaller companies,
disappointed with exploration results and uncertain about the
political climate, gradually pulled out. Thus,

according to a number of observers, the virtual

inactivity of the companies is due to doubts about
the basic provisions of the new contracts which
must be signed with the government. (El Tiempo, 2 Oct. 1972)

Subsequently, it editorialised that

the abandonment of territory, the departure of two

new companies from the country following the same
route as AMOCO, the virtual, paralysis of work in
the Gulf of Guayaquil, the lack of interest with
which work is going ahead in other areas, ought to
stimulate an objective and profound analysis on the
part of the military regime and the population as a
whole, which is the real owner of the petroleum.
January 1973).

Even El Universo wrote that

the exploration activity which several companies

undertook at the same time appears to have stopped
dead and....there are growing doubts about whether
the Ecuadorian government has not miscalculated.
(15 February 1973).
It was certainly true that investment in exploration and even
development had virtually dried up, but the resulting criticism
was largely muted by the fact that the oil was continuing to flow
and that the price was continuing to rise. Nevertheless, the
rest of the government eventually began to pressure Jarrin to
settle and finally presented him with an ultimatum - get an
agreement or resign. When the agreement was finally signed in
August 1973, Jarrin had a signed letter of resignation in his
pocket. 2 1

According to the contract eventually signed, Texas/Gulf

handed back much of their territory but were allowed to keep the
rest until 1992. They would invest US $60m. over the next three
years in order to bring the level of production up to 400,000b/d.
Cepe was to be allowed to buy into the consortium, taking 2 o v e r
four years at a price not revealed officially but believed to be
US $65m. Financially, the Ecuadorian government had already
achieved its objectives, through a complicated set of fiscal
arrangements which could be regulated according to the changes in
the tax reference p r i c e . 2 2 In a market where prices were moving
rapidly and where there was in any case no single world price, it
is almost impossible to evaluate a particular tax structure, but
the Ecuadorian government was certainly not generous. Already
in mid-1972 the World Bank calculated that

comparing the Ecuadorian tax system with the prevailing

Venezuela or Middle East tax structures - using similar
sets of assumptions as to costs and tax reference prices -
the level of most taxes resulting from the Ecuadorian
system is higher than the other two. 23

As world prices mounted, so did those set by Ecuador; they rose

gradually from US $2.30 in July 1972 for 28 degrees API crude, to
US $7.30 on November 10,1973 and the ceiling of US $13-70 set on
January 1,1974- While not exactly comparable , this rate of
increase is similar to that imposed by Venezuela (which rose from
US $2.647 in 1972 to US $14.26 at the beginning of 1974).

As Ecuador's oil revenue increased, so the question of how to

use it became correspondingly more important. Here Jarrin was
also active. His aim was to ensure that the bulk of funds did
not simply flow into those industries (such as construction) where
there was a short-term elasticity of supply at the expense of more
socially valuable but longer-term projects. Thus, he used the
old technique of earmarking, but reversed its direction. His most
important step was to create FONADE, which was set up in December
1973 and entrusted with all revenues stemming from a reference
price of oil which was greater than US $ 7 . 3 0 . He also diverted
the 15% profits tax which was intended for worker participation
away from the workers themselves (who numbered very few) and into
the health, labour and housing ministries. 2 5

It is difficult to trace out exactly the destination of oil

revenue; the World Bank reported that
 since some important public sector agencies do not
currently report their financial operations, it is
as yet impossible to fully assess fiscal performance
...similarly...the pattern of public sector invest-
ment during the period is unclear. It is known,
however, that about one third of FONADE funds were
allocated to a petroleum refinery at Esmeraldas.
Much of the remainder has been allocated to the
sizeable programme of electric power generation.
In addition to these, there have been substantial
increases in education and public w o r k s . 2 6

The estimates available, however, are as shown in Table 1.

Despite the roughness of the data, a number of tentative

conclusions can be drawn from this table. First, one should
note the importance of FONADE which, after 1973, became the
largest single recipient of oil income. Not only did this
involve a proportionate reduction for all other agencies but,
more importantly, the division of income (which gave FONADE all
revenues stemming from an oil price of over US $7-30 a barrel)
had interesting distributional effects. A change in the quantity
of oil exported affected all agencies proportionately, whereas a
change in the price affected only FONADE. Thus, a price cut
would not significantly reduce the budgets of the central govern-
ment, military etc., whereas a cut in the volume of exports might
hit them severely; this made Ecuador disproportionately vulnerable
to company pressure.

Secondly, the capitalisation of Cepe proved to be expensive

- a necessary consequence of the speed with which it was done.
Clearly, some of the funds diverted to Cepe were the foregone
profits of the consortium, but much of the cost was borne in
Quito. This did not really matter in 1974, when there was a
budget surplus, or even in 1975 when the cutback in production
seemed all-important, but in 1976 and 1977 Cepe's share of the
total was seen to be considerable, and this became controversial.
Indeed, after the nationalisation of Gulf at the end of 1976, the
government (in July 1977) decided to reduce Cepe's share of the
take by subjecting Cepe's income to a 17% royalty (of which the
military was to receive 8 . 5 % and INICEL 8.0%). This reduced
Cepe's income to 23.66% while further adjustments slightly
increased the share of income destined for FONADE and maintained
that going to the Central Government.

Finally, there was a shift from current spending to invest-

ment, although the development and welfare ministries do appear
to have benefitted from the changes at the expense of the general
government bureaucracy. The World Bank's "others" category fell
away sharply after 1972 and even the military budget seems, if
anything, to have declined; conversely, housing and labour and
social welfare at least maintained their share of a rapidly
expanding total. The biggest shift, however, was from the
Central Government to FONADE. Thus, at least on paper, the
direction of government spending was positive from the point of
view of development although these apparently determined
desarrollista policies played their part in reducing the govern-
ment's chances of building up a political base for itself. The
overall picture portrayed here is partly borne out by World Bank
figures which showed an increase in government investment of some
in 1973 (in real terms) and approximately 20% in 1974
compared with real GNP growth of 15% and 8% respectively.

However, this growth in spending was substitute for, rather

than complementary to, a major programme of reform. In fact,
many had hoped (and feared) that the new oil wealth would destroy
the economic power of the Guayaquil exporters and permit the
government to carve out a new political and economic base for
itself through reformist-populist policies. Nevertheless, the
regime lacked sufficient determination to pursue such policies in
the face of strong conservative opposition; perhaps the key
question, that of land reform, was decided in the conservatives'
favour when the new law (of 1973) concentrated on improvements in
productivity rather than redistribution. Whatever the
"technocratic" justifications for this law, it failed to make any
major impact on the political or social structure and politics
was left to the established groupings.

1974- The Crisis

The dramatic world oil price developments of 1973-74 had

their impact in Ecuador. This impact was all the greater since
Jarrin had deliberately tried to link Ecuador as closely as
possible to the other oil producing countries and had led it into
OPEC in November 1973- In the eyes of many government ministers
OPEC membership seemed to have its advantages; apart from the
prestige itself, it might also strengthen Quito's bargaining
position against the consortium. Certainly, the regime entered
OPEC with its eyes open. As President Rodriguez Lara pointed
out,

every proposal, every step was considered in detail

and submitted for the consideration of every govern-
ment member who was concerned with the matter, before
responsibility was finally handed over to the
Ministry of Natural Resources.27

However, membership was even more important to Jarrin personally;

he was anxious to use the oil weapon internationally to bring
about changes in the international balance of power, and
domestically to bring about changes in political attitudes.
OPEC membership would help Ecuadorian nationalists
ideologically, and would therefore provide backing for Cepe's
gradual takeover of the consortium, and for foreign economic
policies which would have been quite unthinkable only two years
erlier.

Nevertheless, Ecuador's membership of OPEC was always

controversial domestically, and it proved to be more so as the
costs of membership became more apparent- There were always
those ready to argue that Ecuador, as a small producer and a non-
Arab state, was better off maintaining its own freedom of action
since it had no interest in Middle Eastern conflicts and was in
any case not powerful enough to play a real part in international
politics. According to this view, Jarrin was suffering from
delusions of grandeur; Ecuador simply was not Saudi Arabia. As
a small producer, it should keep its traditional alliance with
the USA, while at the same time benefitting from the changes in
world price levels. Such a view was held particularly strongly
within Ecuador's Foreign Ministry.

This basic conflict became increasingly important as 1974

wore on. At the beginning of 1974, Washington began its anti-
OPEC offensive. At first, this focused on an attempt to split
Saudi Arabia from Iran and the more "hawkish" countries; at this
time, the CIA believed that there was a real chance of Saudi
defection from OPEC. 2 9 Thus, on February 23rd the Guardian
reported that "the American view, currently being urged on King
Faisal, is that OPEC itself is in many ways irrelevant and that
Saudi Arabia could go it alone". This pressure appeared to have
paid off when, at the beginning of June 1974, Sheik Yamani called
for a cut in the oil price to US $9 a barrel.

As the expected price cut failed to materialise, however,

Washington put increasingly public pressure on the other OPEC
governments. Thus, in July 1974, the State Department "in a
highly unusual move" publicly criticised Gulf Oil for paying
allegedly excessive prices to Kuwait for its o i l . I n the same
month, US Treasury Secretary Simon publicly described the Shah of
Iran as "a nut".31 Similarly, Quito's decision in May 1974 to
order a production cutback from 250,000 to 210,000 b/d met
scarcely veiled criticism from Washington; US Under Secretary of
the Treasury Jack Bennet remarked that "any new reduction in oil
production, by any government, at the present moment, will be
clearly considered by the USA and other consuming nations as a
counter-productive measure".32

During 1974, Jarrin worked hard to keep OPEC together.

Since his work took place behind the scenes and he attracted
little publicity during the period, his role was difficult to
evaluate. Undoubtedly, however, his efforts to avoid an open
split between Iran and Saudi Arabia were very much appreciated.
The decision to hold the June 1974 meeting of OPEC in Quito, the
success of that conference despite Yamani's plea for a price
reduction made only a few weeks earlier, Jarrin's own appointment
 as President of OPEC, and the many messages of support sent by
OPEC countries to Jarrin after his eventual dismissal from the
government in October, all indicate that Jarrin played a vastly
more important role in OPEC than might have been suggested by the
volume of Ecuadorian production.

By the end of August, the American diplomatic offensive

against OPEC had clearly failed. The signal of this failure was
Saudi Arabia's publication of its decision not to cut its oil
price but to cut its production instead.33 Consequently, after
OPEC's meeting of September 1974, Ford and Kissinger made aggres-
sive speeches to the U.N. which appeared to be aimed at persuad-
ing the non-oil-exporting developing countries to turn against
OPEC, and seemed also to threaten some form of trade boycott
against OPEC members. Kissinger asserted that n The World cannot
sustain even the present level of prices, much less continuing
increases....what has gone up by political action can be reduced
by political action". Members of OPEC were divided over the
best way to respond to these speeches. The Middle Eastern
countries, presumably believing that Washington's threats were
empty but having no wish to provoke a confrontation, simply
wanted to ignore these statements. The Latin American countries,
however - both Venezuela and Ecuador - wanted to rise to the bait
in order to strengthen OPEC's unity and to stake out a position
in the diplomatic battle for the loyalties of the Third World.
Jarrin, who had already gone out of his way to stress that OPEC
had responsibilities to the rest of the Third World, then broke
his silence to deliver rhetorical attacks upon Ford and Kissinger
which finally precipitated his dismissal.

This international situation was obviously important within

Ecuador. There can be little doubt that the American Embassy
encouraged the Texas/Gulf consortium to take a hard line against
Quito in general and against Jarrin in particular. However, the
state of the world, and Ecuador's, oil market made such persuasion
more than usually acceptable. Ecuador's relative tax position
during 1974 is extremely complicated and quite impossible to
evaluate without inside information. There were various national-
isations (total and partial) in the Middle East during 1973-4, and
the resulting confusion between posted prices, buy back prices,
auction prices and various other forms of price was almost total.
By August 1974, even the Petroleum Intelligence Weekly was reduced
to remarking that "it is almost impossible to sort out the world
oil price structure at the moment".35

By mid-1974, however, one thing was clear. The world

market had changed from a condition of deficit (brought on by the
Saudi Arabian cutback) to one of surplus. On June 27th, the
Guardian reported that "a substantial surplus has already started
to accumulate. Storage capacity is almost exhausted. Within
the next few weeks, the oil companies expect to start cutting
back the rate at which they ship oil from the producer countries".
As if on cue in Ecuador,
 at the end of June 1974, there were various breakages
in the pipeline and the repairs held up production
for more than a month, testing took several days more
and, at the same time, the government faced its first
pressures opposed to the increases in taxation
decreed by the government.36

This breakdown compared interestingly with an earlier pipeline

breakdown - in May 1972 - when the damage was repaired within a week.

These international conditions need to be considered along-

side the condition of Ecuador's domestic oil industry in 1974.
Indeed, the transformation of relations between Jarrin and the
consortium from the relative harmony of late 1973 (when the
renegotiated contracts had been signed with the companies) to the
outright antagonism of September 1974 almost certainly owed a
great deal to domestic conditions. The change began in March
1974 when Cepe's offer of oil contracts, in preparation since the
previous year, attracted a derisory response - with only Kopex
and YPF applying for the available acreage. Since over 30
companies had earlier expressed interest, the circumstances
seemed suspicious. Jarrin blamed Minas y Petroleos for
organising a boycott and on March 7th he made public a communi-
cation from Minas which made his point. In the communication,
Minas claimed that it still had rights to part of the acreage
(which had been its former concession area, cancelled in March
1973 following Minas' refusal to pay the higher surface taxes
decreed in June 1972) and threatened to sue anybody moving into
it. Minas admitted that, at the end of February, it had sent a
duplicate copy of this letter to all 35 pre-tendering companies.

Since Minas had spent quite heavily in this area and had
indeed found what it believed to be commercial quantities of oil,
it is not surprising that Minas' letter influenced the bidding.
Certainly other, undisputed, territory was also put up for
contract but "this was geologically less promising. It is
certainly probable that the terms themselves were not particularly
attractive (although considerable scope was left for further
negotiation) but there is no reason for believing that Jarrin
intended the offer to fail in order to justify an intensive
nationalist policy. On the contrary, Colonel Jaime Duenas, the
head of Cepe at the time, had been pressing for even harder
terms, presumably for tactical reasons since Duenas was not a
figure noted for his nationalism.37

Certainly, there is no doubt that Jarrin believed himself

to be the target of a conspiracy. Thus, in March he attacked
the press for its

comments and editorials which are written by agents

of foreign interests, which, though apparently concerned
with national problems, always try to keep Ecuador tied
to the exploitation of the great international markets. 38
Moreover, this experience made him even more concerned with the
values of conservation and nationalisation. Thus, he declared
that

we need to undertake a serious analysis of the

national oil industry, in order to redirect policy
towards a strict conservation of resources, we
should plan in accordance with the universal theme
of not exploiting hydrocarbons for the sake of
exploiting them, since the petroleum which remains
conserved will have greater value in the future...
the oil which there is in the Ecuadorian Oriente
will not remain in the bowels of the earth, as
certain interested parties pretend; Cepe will
exploit it on its own. 39

This vigorous reaction brings out an important aspect of

Jarrin's political approach. Whereas others might retreat under
attack, in the hope of achieving their objectives by stealth or of
securing a compromise, Jarrin reacted belligerently. Convinced
that his days in office were in any case numbered, he tried to
achieve the maximun in the shortest time possible. His concern
was as much to change the mentality and consciousness of the
military and the public administration in general, as to achieve
longer-term political ambitions of his own.

This attitude once more brought Jarrin into conflict with

Texas/Gulf for what proved to be the decisive encounter. After
the contract of August 1973, the consortium had intended to
increase its output to 400,000 b/d.40 Jarrin, however, was less
co-operative than the consortium hoped. Already his Ministry
was becoming concerned with the way in which the fields were
being operated, since Texaco had not only stopped exploration but
had also cut down its field maintenance to the absolute minimum;
officials feared that the fields might become irreversibly
damaged. Thus, in early 1974, the companies

stated with interesting optimism that the final

recoverable output from their reserves was of the
order of 3,4°° million barrels, and that they
could plan a rate of production of 320,000 barrels
a day if permission was given to them to increase
output, from the authorised rate of 230,000 barrels
daily. 42

Of these 3,420 million barrels, however, only 1,726 million were

proved. The consortium offered to develop the rest if they were
allowed to expand production. Jarrin, however, insisted that
they carry out sufficient development to prove these reserves
before permission could be granted.43 Clearly, Jarrin's requiie-
ments would have involved considerable delay at a time when
prices were at a peak and when the companies were desperate to
boost output as a result of supply cutbacks and political fears
in the Middle East. It is quite likely that it was this refusal
which persuaded the companies that Jarrin was an irreconcilable
enemy. Nor would their attitude have changed after May 22nd,
when Jarrin ordered the consortium to cut back its production
from 250,000 b/d to 210,000 b/d as a conservation measure. At
the end of June, by which time Jarrin had again raised taxes
(after the OPEC meeting of that month, he put up the royalty
from 16% to 16.67%), the companies launched their counter-
offensive.

Rather than go onto the defensive, Jarrin pressed on in the

hope of achieving the maximun in the limited time remaining. In
June, he was able to complete Cepe's purchase of 25% of Texas/Gulf
and in the same month he pushed through a decree which authorised
Cepe to take gradual control of the domestic market; 100%
control was to be achieved in two years. In October, when on
the point of dismissal, Jarrin sent "a signed bill to the
Presidency for the purchase of up to 51% stock".44 If implement-
ed, this would have given Cepe control of investment decisions
and would have reduced seriously the danger of a company boycott
- although it is more likely that the proposed measure would have
induced the companies to demand full scale nationalisation and
thus led Jarrin into a showdown with his conservative opponents.
In any case, he departed at the beginning of October and this
proposal was quietly dropped.

Eventually, therefore, Jarrin's opponents proved too strong

for him, and on October 4th he was removed from the government
and sent as military attache to the London Embassy. By this
time, he was opposed by a number of old politicians, whose
positions had been threatened by action taken by the government
over the ADA concession and the state refinery. These had
connections with much of the press which, traditionally close to
the private sector, in any case resented Jarrin's attacks, was
mistrustful of his radicalism and afraid of a confrontation with
the companies and with Washington. Similar sentiments motivated
the Ecuadorian business community; quite apart from its mis-
givings about the development of a more powerful and efficient
state, it feared the short-term economic consequences of a
serious conflict with the companies. To these open influences,
which had to be somewhat muted for fear of encouraging pro-Jarrin
sympathies within the military, must be added the more potent but
quieter pressures working within the regime and within the army.
There was an Israeli military mission in Ecuador which had already
proved influential; during 1974 Jarrin had several times request-
ed but been refused permission to visit Arab members of OPEC while
several army officers paid semi-official visits to Israel.
Indeed, the Ecuadorian government has continued to follow its
traditional pro-Israeli line, voting against the famous "Zionism"
resolution of 1975. Washington's influence is difficult to
discern but was surely present; in 1974, the Nixon-Kissinger
foreign policy continued largely uninvestigated and the CIA's
involvement in Chile had not yet come to light. Certainly,
during 1974 a number of rumours circulated within the Ecuadorian
Army to the effect that Washington would cut military aid unless
Jarrin were removed from his post. Washington also had natural
allies within the Ecuadorian foreign ministry whose traditionally
pro-American outlook had been threatened by a man from outside
the department. 45 Moreover, when pressure mounted, Rodriguez
Lara began to weaken; he was said to be increasingly concerned
about the prestige accruing to his "Super-minister" and he
certainly proved willing to dispense with him when he appeared a
liability.

Overall, therefore, both domestic and foreign influences

seemed to be at work in removing Jarrin. His internal position
was never so secure that he could survive a major crisis,
although it had earlier proved sufficient to withstand the
opposition of purely domestic conservatives. Indeed, it is
notable that Jarrin's dismissal was precipitated by the rhetorical
attacks which he made upon the American administration. El
Tiempo explained that

Jarrin Ampudia, referring to the speech given by

President Ford at the General Assembly of the United
Nations, said that American pressures were unaccept-
able and that statements of a "neocolonialist"
nature had been made obsolete by events.
These declarations were received with concern in
conservative circles which branded them as demagogic.
On the other hand, these same circles have said that
the Minister had put Leftists in his ministry.
(6 October 1974).

Jarrin did maintain considerable support from those officers

who were naturally sympathetic to a nationalist line and who
believed that Ecuador had been put "on the map" by its participa-
tion in OPEC. His most valuable support, in fact, lay within
the Navy and particularly with its head - Admiral Vasquez.
These supporters did not have enough strength to protect Jarrin's
position in October 1974 but they did make it difficult for the
regime to repudiate his policies subsequently. Moreover,
Rodriguez Lara had earlier taken care to present himself as a
nationalist - when he opened the OPEC conference in Quito for
example. Perhaps most important, however, was the fact that
Jarrin's own boldness had made retreat difficult; his successors
were always willing to make a few quiet concessions to the
companies, but so much had happened that these were barely enough.
The full restoration of "investor confidence" would have required
an open capitulation from Quito, which the companies were not
strong enough to force.
Ecuador under Siege; 1973-5

Once Jarrin had resigned, the companies tried to press their

advantage. They were favoured by world market conditions and in
particular by the growing surplus of crude oil which had become a
glut by the middle of 1975- At the same time, the weakening
world price, combined with Ecuador's fixed tax reference price,
increasingly forced the hand of the companies; there is no
reason to doubt company claims that their Ecuadorian profits in
the mid-1974 - mid-1975 period were negligible or even negative.
Moreover, Washington's interest in Ecuador, while somewhat
diminished after the fall of Jarrin, had not disappeared entirely.
This became clear when Washington raised the ADA question just
after Jarrin's resignation.

The ADA concession, as we have seen, had been cancelled in

November 1972 as a result of alleged irregularities and for the
next two years no firm decision was made on the future of the
area. With the fall of Jarrin, however, Washington believed that
the time had come to settle the matter and, late in October 1974,
sent Quito a note which called for a return of the concession to
ADA.46 The initiative met with a rebuff from Quito47 and
Ecuadorian policy remained unchanged. Indeed, Washington's note
appears to have stemmed from a remarkable ignorance of Ecuador.
Jarrin, while a nationalist in other matters, had never been a
hard-liner on ADA; even in 1972 he had recommended that
compensation be paid to ADA but was overruled by the government. 48
Subsequently, he had tried to renegotiate the terms of the ADA
concession with Phillips Petroleum (which had bought its way into
the concession after it had been issued, and so was not concerned
with its original acquisition) and in 1974 three times presented
revised terms to the Council of Ministers, only to have them
rejected; the regime was afraid of possible political scandal.

Washington's relations with Quito did not improve at the

beginning of 1975 when it issued its Trade Act denying tariff
concessions to those Third World countries which were members of
OPEC. Although it appears that this law was essentially aimed
at the Middle East, it certainly had its effect in Quito. Here
some pressed for the withdrawal of Ecuador from OPEC, but others
reacted against yet another manifestation of "big stick"
diplomacy. In January 1975, Washington also made it clear that
it viewed with misgiving continued loans from the international
agencies to members of OPEC - even the poorer ones.49 Nor did
Washington's position in Ecuador improve when Agee's book (Inside
the Company) was published in January 1975, providing an account
of CIA activities in Ecuador in 1960-2, citing a number of well-
known Ecuadorians as CIA agents and recounting some of the CIA's
methods of putting pressure on the government.

Overall, it is likely that Washington's intransigence during

the period was counter-productive. Quito was undoubtedly willing
to make a number of relatively minor concessions to the companies
in order to get activity moving again, but Washington's position
made it increasingly difficult to do this without admitting
defeat and, despite the removal of Jarrin, Ecuadorian nationalises
at the beginning of 1975 were far from being defeated.

Nevertheless, Quito was willing to make some concessions to

the companies in order to try to secure a resumption of explora-
tion. The first of these was its decision not to increase its
price level in line with OPEC recommendations at the beginning of
1975. However, with world demand continuing to fall, this was not
enough and further price reductions appeared to be in prospect.
Thus, according to the New York Times on February 25th, "Ecuador
...is likely to cut the price of crude within the next few weeks,
following several months of strong pressure by United States
petroleum companies". In the same month, the Ecuadorian Finance
Minister predicted serious economic consequences if the oil price
was not cut. As the Quito government continued to hold out,
company pressure intensified.. On March 19th, representatives of
Texas/Gulf met Rodriguez Lara and threatened to pull out unless
three demands were met: the tax reference price was to be cut
from US $13.70 to US .$10.25, the domestic selling price was to be
raised, and companies were to be paid US $59-2m. which they said
was owing as a result of local purchases by Cepe, Cepe's purchase
of 25% of the consortium, and the Central Bank's delayed repayment
of money which the companies had banked in Ecuador.50

It is clear that the growing world surplus of oil was

sharply changing the balance of power between government and
companies. If the Ecuadorian government could not market its
oil, nationalisation was an empty threat. If the companies did
not need Ecuador's oil supply, they could afford to threaten to
pull out, while adding to the pressure by cutting back production.
In any case, the government was in no position to nationalise for
technical reasons - it was still building up its own expertise.
At the same time, three years of rapid economic growth had left
Quito more dependant than ever upon a secure source of revenue
and thus more vulnerable than ever to company pressure. In the
first six months of 1975, Ecuador ran a trade deficit of
US $150m., with oil exports down to US $213m. (from US $430m. in
the first half of 197*+) and total imports up 69% from a year
earlier. The oil honeymoon period was over.

These reductions in income were particularly serious because

of the weakness of the government's political base. Certainly,
in 1975, the civilian Right began to recover confidence. In May
1975, Camilo Ponce and Carlos Julio Arosemena (two civilian ex-
Presidents) formed a Frente Civico to oppose the Junta, in what
was a deliberate carbon copy of the successful anti-military
campaign in 1 9 6 6 . Unlike 1 9 6 6 , however, the fight had not yet
gone from the military, among whom there were still influential
nationalists. The most prominent of these was Admiral Vasquez
who circulated a report on 18th May 1975 which argued that
Ecuador should "act in close harmony with the marketing policy
decided by 0PEC", 5 1 and should also look for new markets within
Latin America. Among other points, he argued that

It is crucial to maintain price levels and

increase state participation in the profits of
the companies by means of a vigorous OPEC policy
which should bring supply and demand for oil into
balance on the world market and guarantee the
conquests which the country has already made in
this matter.

Nevertheless, the nationalists could do no more than mount a

blocking and delaying action, as the government gradually respond-
ed to the pressures placed upon it. Already, in March, the
government had decided not to press ahead with the takeover of
51% of the consortium after the latter had threatened to pull out.
Even so, the government appeared to oscillate between promising
concessions to the companies and threatening them with sanctions
if they did not increase their liftings. Thus, on April 14th,
the government ordered the companies to maintain a level of
production of 210,000 b/d and gave Cepe the right to take its
25% of this maximun figure rather than of the actual levels of
production achieved. In fact Cepe found little difficulty in
selling its 25% share of consortium oil, although most of its
outlets were on the cheaper West Coast whereas most company oil
had to take the more expensive route through the Panama Canal to
the Caribbean. The contrast between Cepe's and the companies'
sales was certainly marked in Ecuador, where El Universo
editorialised on May 1 5 t h that

The government must use its full authority and

defend the principle that contractual obligations
should be carried out by Texaco and Gulf since it
is alarming to hear that Cepe is selling its oil
normally on the world market.

However, the majority of the government remained convinced

that some further concessions would have to be made to the
consortium. Their rationale for doing so was set out in a speech
by the Natural Resources Minister, Admiral Salazar, given on May
26th. According to Salazar, Ecuador's proved reserves amounted
to some 1,5 billion barrels, which would permit present levels of
oil output to continue only up to 1 9 8 1 . Meanwhile, domestic
consumption was increasing, cutting into the exportable surplus.
Thus, concessions were needed in order to encourage a resumption
of investment activity.

It would not be surprising if many of these reserve figures

were found to come directly from the companies themselves, who
were now interested in naming as low a figure as possible.
Certainly Ecuador seemed to have "lost" a lot of oil since early
1974, when Texas/Gulf told Jarrin that reserves amounted to
billion barrels. Of course, the different figures reflected
different calculations, and 1.5 billion barrels might have been
realistic under the assumption that no work at all was done on
the fields. However, Ecuador's real problem was not one of
"fifteen years hence", but rather of immediate liftings and the
immediate balance of payments. The government itself was well
aware of this, and the emphasis on long-term planning seems to
have been no more than an attempt to disguise its retreat.

The question of OPEC was also important. As we have seen,

Ecuador's membership of OPEC was a matter for strong conservative
criticism and, in the early part of 1975? such criticism appeared
to be justified. The world oil surplus increased substantially
and it appeared to many that the price of oil was on its way down.
Washington was continuing its diplomatic effort to bring about
such a decline and the future of OPEC itself seemed in the
balance. Thus, even as a small producer, Ecuador had a signifi-
cant part to play in the world market. A sharp price cut,
possibly coupled with a withdrawal from OPEC, would amount to a
sharp psychological blow against the organisation and would put
more direct pressure on Venezuela.

Rodriguez Lara, however, was extremely reluctant to take

this path. He had opened the OPEC conference in Quito in the
previous year and had associated himself closely with national-
istic oil policies when the political cost was low. Total with-
drawal, therefore, would have been a severe, possibly fatal, blow
to his credibility. At the same time, however, a continuing
fiscal crisis brought more immediate threats. As a possible
escape hatch, Ecuador at the beginning of 1975 sought a large
low-interest loan from OPEC; this application had Venezuelan
support and was initially regarded favourably by a number of
other countries. By June, however, OPEC interest had lessened;
it was now increasingly clear that Saudi Arabia was willing to
sustain the oil price by restricting its own production and
consequently, from the perspective of the Middle East, Ecuador
again came to appear a small, peripheral and generally unimportant
producer. Thus, at the June meeting of OPEC, no loan was
offered and almost immediately afterwards Ecuador cut its tax
take by 43c a barrel (on 28 degrees API crude); this fell from
US $10.84 to US $10.41.

This price cut, however, was very much a compromise. The

government claimed that it followed OPEC guidelines and both the
Venezuelans and the domestic nationalists soft-pedalled their
opposition. The reduction was sufficient to get exports back up
towards 210,000 b/d, but was not enough to induce the consortium
to resume investment; in August, Bucaram of Texaco was publicly
pressing for a new tax cut.53 Indeed, the government appeared
willing to make further concessions to the companies later in the
year.

At the end of September, the regime was able to put down a

bitterly fought coup attempt, involving a Right-wing General,
the Frente Civico and the major political parties; the precipi-
tating factor for the coup was apparently the regime's imposition
of import restrictions on a number of luxury goods, in response
to the worsening balance of payments position. Under these
circumstances, it is not surprising that the government renewed
negotiations with the companies in September, when Admiral
Salazar was replaced as Natural Resources Minister by Colonel
Jaime Duenas, an ex-head of Cepe whose differences with Admiral
Jarrin had been well publicised. Accordingly, the government
decided, in October, not to implement the full 10% price increase
decided upon by OPEC during the previous month; this decision
was presaged by Duenas 1 remarks in September that, while Ecuador
would remain a member of OPEC, it would "accept the decisions of
OPEC as suggestions, but not as orders' 1 .^ In fact, the final
price increase was around 6% although some sections of the govern-
ment wanted even l e s s . 5 5 For the rest of the year, negotiations
continued, but no final agreement could be reached, largely
because of the increasingly obvious differences within the govern-
ment itself.

1976. The Consortium Splits

By the end of 1975? the worst international storm had disap-

peared. By then, the survival of OPEC appeared guaranteed by
Saudi Arabian willingness to cut back production, and the price
increase of September 1975, together with the increase in world
demand in the second half of that year, made it clear that the
worst was over for the oil producers. Moreover, Ecuador had now
decisively removed itself from the centre of world events - the
fall of Jarrin and the price cut of July 1975 had ended Quito's
brief flirtation with the Third World movement and foreign policy
returned to a modified pro-American line. However, politics
within Ecuador were less clearly defined; the military conserva-
tives had increased their power considerably during 1975 but the
supporters of Jarrin were still quietly influential. The
decisive domestic political battle had still to be fought.

The coup of January 1976 was generally seen as a move to the

Right, although the regime promised to maintain essential
continuity with its predecessor and to go ahead with elections
which were to have been held at the end of 1977 (and which are
now scheduled for 1978). The head of the Junta, Admiral Poveda,
was widely seen as pro-American and the senior army officer,
General Duran, was similarly conservative. The continuing
strength of the nationalists, however, could be seen in the
appointment of Colonel Rene Vargas, ex-fyead of Cepe and a close
friend of Jarrin, to the Natural Resources Ministry in place of
Duenas, whose re-appointment had been widely expected. As would
soon become apparent, however, Colonel Vargas had views on oil
which were somewhat different from those of his superiors.

A striking feature of the first few months of 1976 was the

recovery of voice and confidence by the business community, which
now felt it had the opportunity of coming to terms with the
regime. Businessmen were concerned with oil in two ways; on
the one hand, a constant flow of oil revenue fed its way into
domestic demand and profits, while, on the other, oil revenue
increased the power of the state and thus the threat of unwelcome
government policy. In 1973 and 1974, when manufacturing grew
by 7-8% and 11.6% respectively, a general sense of wellbeing
tended to quieten protest, although even then there were mis-
givings that the state might use its oil revenues in various
unwelcome ways.56 The anxieties and new taxes of 1975, however,
although they did little to slow down economic activity
(manufacturing grew at 12.5% in 1975), proved that oil abundance
did not, of itself, guarantee the prosperity of the private
sector.

Thus, at the beginning of 1976, a co-ordinated series of

statements were put out by various heads of commercial or
industrial chambers, all to much the same effect. They argued
that the cut in export revenues of 1975 should have taught the
government that extreme nationalism did not pay, and that a
careful conservative policy was required to encourage investment
in oil exploration and thus maintain the flow of oil revenue.
Moreover, the private sector was equally critical of what they
saw as the growing state control of the economy; and Cepe
increasingly found itself as a focal point of such criticism.

Cepe's existence was not controversial. Indeed, the

creation of the company had first been proposed by the military
junta of 1963-6, and every subsequent government had at least
played lip service to the idea before Cepe was finally set up in
1972. Moreover, there was little disagreement about Cepe's
initial steps - including the takeover of a number of old coastal
oilfields whose concessions had lapsed, the drafting of service
contracts and the planning of a state refinery at Esmeraldas.
However, as the share of oil revenue diverted to Cepe increased,
and as its organisational and technical problems became more
apparent, so criticism mounted.

Cepe's position was particularly important in that a state

oil company was the only possible alternative to the foreign
companies and thus a possible instrument for nationalisation.
For this reason, Cepe was strongly defended by the nationalists
and regarded with suspicion by the conservatives. The extent of
this suspicion can be seen by the response to a contract signed
between Cepe and ROMPETROL. This controversy was initiated by
the Washington Star on 1 9 t h April 1976, which reported, a propos
of nothing in particular, that Washington viewed with alarm this
contract (which had initially been signed in May 1975, when it
attracted little attention) since it increased Communist
influence in Latin American oil. The story appears to have been
drafted as part of a carefully timed move to put pressure on the
Ecuadorian government now that negotiations with the Texas/Gulf
consortium were once again reaching a crucial stage. This
article provided a cue for Ecuadorian conservatives to attack the
government and demand the cancellation of the contract which the
government eventually agreed to do. While of no great intrinsic
importance, this incident illustrates the extent to which
Ecuadorian conservatives were willing to follow a lead from
Washington in order to attack a government which could no longer
be described as particularly radical or threatening to conserva-
tive interests.

Certainly there were many serious problems with Cepe. It

had expanded too fast, in too many different directions, and with
too little conception of its own role. Nationalists pressed for
an extension of its responsibilities into activities for which it
was ill equipped (its takeover of all internal distribution in
June 1976 was accompanied by widespread gasoline shortages), while
conservatives seemed far more ready to criticise and attack the
company than to suggest how it should be improved. Such
criticism led to a defensive reaction by Cepe which resulted in
further bureaucratisation and inefficiency. Essentially, for as
long as Cepe was a political issue, under attack from vocal
opponents and half-heartedly defended by a weak and divided
government, there was very little chance that it would learn to
operate effectively. However, until there could be some
solution to the conflict between Quito and the consortium, Cepe,
as a potential instrument of nationalisation, was certain to be
at the forefront of the political stage. This impasse was only
partially broken at the end of 1 9 7 6 with the nationalisation of
Gulf.

Indeed, the conflict between Gulf Oil and the Ecuadorian

government was the major feature of 1976- It was accompanied by
a growing difference in outlook between the two companies of the
consortium. Texaco was more accommodating than Gulf, partly
because it sold Ecuadorian oil directly to its own subsidiary
and so could charge itself whatever prices were most convenient
whereas Gulf had to sell on the open market. There may also have
been more subjective reasons. The head of Texaco ! s operation,
Rene Bucaram, had earlier worked in the government bureaucracy and
continued to enjoy good relations with many of its members, some
of whom seemed to derive their whole knowledge of the industry
from what they were told by the companies. Accordingly, it is
possible that Texaco picked up the importance of the 1976 coup
and the military's gradual move to the Right more quickly than
did Gulf.

In any case, for whatever reasons, even after the tax

reductions of 1975, Gulf remained unhappy with its operations in
Ecuador; it measured its rate of return as little better than
5% as against the 15-20% that would have been satisfactory.57
Consequently, it was prepared to take a hard line in 1976, with
the option of pulling out if its demands were not met.

The regime was apparently prepared to consider satisfying

the companies, provided that this could be done reasonably
cheaply. It began by trying to find out what Texas/Gulf's terms
were. They were not left in doubt for long. It was reliably
reported that in March the companies demanded a further fall in
the tax reference price together with a further reduction in
taxation. They wanted an extra 50c. a barrel profit if they
were to resume the investment in their existing fields, and a
further 50c. a barrel if they were to develop new areas.

Although these terms were not acceptable, further negotia-

tions continued behind the scenes. Ostensibly, complete break-
down had taken place in March, and reports by the Petroleum
Intelligence Weekly (8th March) and Piatt's Oilgram (17th March)
stated that the companies preferred nationalisation to their
existing position. However, this did not prevent the consortium
from asking in May for an increase of 10c. a barrel in the cost
allowed against tax, and promising that, if this was granted, they
would embark on a programme of "reconditioning" the wells in the
concession area, as set out by a study drawn up in March.58
Although this request was granted at the end of May, it was
clearly not enough, and, on July 27th, the Financial Times
reported that

although Texaco and Gulf have consistently denied

that they would like to get out of Ecuador, it is
an open secret that they have been discussing
nationalisation terms with the military.

Meanwhile, the government itself was divided over the oil

issue. Colonel Vargas had presented a report to the government
in March 1976 which responded to the consortium's call for a
US $1.05 tax reduction by calling for nationalisation. In a
detailed presentation, he explored the possibilities of national-
isation with compensation coupled with a short-term management
contract with Texaco, and claimed that nationalisation could be
made profitable if the oil were to be sold to other Latin Ameri-
can countries. The revenue thus generated could be used to
finance the required re-investment in exploration. While this
programme was not regarded with much enthusiasm within a cautious
and conservative Junta, it was impossible for the regime to
reject this position out of hand. Nationalisation, therefore,
remained on the agenda; as the Financial Times put it,

though internal divergences among the military

have so far prevented any direct move to oust the
Junta, many people feel that its prestige has
fallen so low that such a step [ nationalisation ]
seems almost inevitable. In particular, a group
 of progressive army colonels is making its
influence felt in the political arena. Even
if the Junta would like to remove Colonel Vargas
and the head of Cepe, Colonel Luis Pineros, for
their radical attitudes, the repercussions might
cause its own demise.59

Moreover, by mid-1976, Jarrin had returned from his diplomatic

post in London and, in June, he launched a strong defence of his
own and Colonel Vargas* position at the University of Guayaquil.
However, despite (or because of) these pressures, the regime
still found itself unable to take a decision.

The storm finally broke at the end of July 1976 when Gulf,
now determined to get itself nationalised, sued Arco for receiving
Cepe's crude which according to Gulf, in reality belonged to the
consortium (Texaco meanwhile emphasised that it had nothing to do
with the dispute). The conflict went back to Decree 285 of 1*fth
April 1975? according to which Cepe's 25% share of the consortium
entitled it to receive 25% of authorised production of 210,000
b/d, and not of actual production. The aim of the law had been
to free Cepe from the semi-boycott organised by Texas/Gulf in
early 1975 but by mid-1976, Cepe was selling oil at a marginally
better rate than the consortium and was anxious to maximise its
sales.

On August 31st, Gulf went further and demanded its own

nationalisation. Pineros, the head of Cepe, immediately demand-
ed that Gulf deposit in the Central Bank a figure corresponding
to oil exports between February and August which had not been
paid (although leave of 120 days was generally given for this).
Gulf's move did finally unite the government and, on September
7th, Colonel Vargas announced that Cepe was negotiating for
Gulf's share of the consortium. Vargas also claimed that Gulf
owed US $32m. in backpayments and further demanded that payment
should be made within 30 days if Gulf was not to be confiscated.

Even at this point, conservatives still mistrusted the

direction of government policy, even though the regime had
obviously been forced into nationalisation by Gulf and had no
particular enthusiasm for the step. Consequently the regime
felt it necessary to prevent the nationalist issue spinning out
of control, and was therefore determined to avoid making political
capital out of nationalisation or even turning it into a political
issue. Thus, it discouraged the formation of a pro-national-
isation pressure group and, in August, banned a proposed "march
for the nationalisation of oil". Moreover, Colonel Vargas, who
had earlier tried to attract civilian support for a nationalist
oil policy 6 0 , was kept out of the decision-making process as far
as possible. In September, when the government responded to
Gulf's payment of its debts by setting up a special commission to
discuss compensation, Vargas was excluded - all the more remark-
ably in view of the fact that the commission included several
representatives from Gepe and participation from the Central Bank
and the Procuradoria. Negotiations in fact continued on a low-
key note until a working agreement was reached in December.
According to this, Gulf would receive US $82m. and the difference
between this sum (the government's valuation) and Gulf's valuation
of US $117.5 m., would be decided upon by a group of accountants
acceptable to both sides. Although there were a few loose ends
which still needed to be tidied up, Gulf's assets passed under
the control of Cepe which now had 62.5% of the consortium.

Conclusions

By the end of 1976, the military radicals had been defeated

politically; a conservative regime, under full control, was
paving the new way for elections to be held in 1978. Oil policy
similarly changed; Cepe (now 62.5% owner of the consortium)
reached a new series of agreements with Texaco that were expected
to lead to a considerable increase in production over the next
few years. New legislation was planned to end Cepe's marketing
monopoly, and to restrict its activities to production and
refining. When one considers broader questions, it is tempting
to quote from Fitch's conclusions regarding an earlier phase of
Ecuadorian history,

after more than three decades of modernisation,

the basic social structure remains intact, the
economy remains wedded to externally controlled
markets for primary products, and the political
system still lacks legitimacy and institutions
capable of mobilising support on a sustained
basis.

Indeed, like the 1 9 6 3 - 6 6 government, the Rodriguez Lara regime

was "stranded between its adherence to reformist principles and
its desire to be an accepted and 'democratic' leadership".62
Much, therefore, remains the same.

On the other hand, any evaluation of this period must take

into account the cohesion and strength of conservative opposition.
Moreover, it is clear that Washington played an important part
in this, through its military connexions (and Israeli ones, which
would surely not have existed but for American support), through
the real economic power possessed by an oil consortium with close
Embassy connexions and given the extent to which domestic
conservatives were willing to follow a lead from Washington.
While American support for domestic conservatives was occasion-
ally blundering, it was often effective and did play an important
part in averting the immediate threat to their interests posed
by the sudden increase in oil revenue and the consequent
increase in the independence of the Ecuadorian state.

Perhaps the most interesting feature of the period, however,

was not the eventual defeat of the radical challenge but rather
the challenge itself and the extent to which it was successful.
Although they eventually lost office, Jarrin and Vargas had help-
ed put through major changes in the Ecuadorian oil industry. In
February 1972, Cepe had not even been properly created. By
1977, however, it had taken responsibility for 62.5% of the
consortium's production, was undertaking its own exploration
efforts, had almost completed a major refinery and had taken a
monopoly of the internal distribution system. While Cepe's own
management had not inspired a great deal of confidence, the state
company had at least established itself as a possible alternative
to the multinationals, and there was no reason to doubt that its
efficiency would increase with time.

Moreover, membership of OPEC was a new factor in Ecuador's

outlook. Even though Quito has retreated from the extremely
active role played by Jarrin, it has not withdrawn from member-
ship and it is likely that OPEC's expertise and general outlook
will continue to have some effect on the position of the Ecuador-
ian government. This influence may only be to accelerate
changes that would have taken place in any event, but Jarrin's
brief though important role in OPEC's assertion of Third World
solidarity is likely to have long-term effects on Ecuador through
its impact upon the consciousness of the younger officers.

It is also true that, in many ways, Ecuador passed through

these dramatic years very successfully, with its own indecisive-
ness at times rebounding to its advantage. Thus, in 1975, the
government's indecision and drift were probably more successful
in the long run than either total intransigence or capitulation
would have been. Similarly, in 1976, the Gulf nationalisation
was essentially forced upon Quito, but was highly advantageous
it, both because it gave Cepe more power without a drastic
increase in responsibilities, and because it made it easier to
deal with Texaco once its more intransigent partner had disap-
peared. However, this indecision served to obscure the long-
term direction of Ecuadorian policy (no doubt greatly to the
relief of the participants themselves), and it may be years
before this is entirely clear.

The future, however, will largely be determined by the pat-

terns of political organisation which may be thrown up by the new
oil wealth. It is unlikely that politics can long continue to
be fragmented, personalist and clientelistic now that the central
government is in possession of a major source of revenue over
which the main social groupings within the country have little
control. It is almost inevitable that some major political
figure or organisation will use this wealth to build up an
effective clientele whose political reliability can be assured.
One possibility is that the new centre-left parties will succeed
in building up a base around the promise of a more organised
"welfare" politics (on the Venezuelan pattern) with the oil
revenue used to create and solidify popular organisations and
with the oil industry being regarded as a source of finance for
semi-reformist policies. In such an event, a modus vivendi with
the companies and Washington would be likely. It is also pos-
sible, however, that if the return to civilian government expect-
ed in 1978 fails to produce any transformation to a more organi-
sational form of politics, then a new military government will
take power, and will try to carry further the policies of Jarrin
and Colonel Vargas by moving towards full nationalisation,
possibly coupled with a more determined form of radical-populism
than we have yet seen. It must be said, therefore, that the
full significance of the 1972-6 period will not be clear until
the longer-term political developments have a chance to work
themselves out.
 NOTES

1. I wish to thank David Corkill and David Goodman for their

help in the preparation of this paper.

2. Jarrin speech to OPEC assembly, 15 June 1974.

3. Interview with Admiral Jarrin, Quito, August 1977.

4. Quoted in the World Bank, Current Position and Economic

Prospects of Ecuador, 1973-

5. See New York Times, 16 May 1972.

6. JuntaPlan Book 3 Part 2; Programa de Desarrollo del

Petroleo. (1966?).

7. World Bank, op.cit. 1976.

8. See 0. Hurtado» El Poder Politico en el Ecuador.

(Quito, 1 9 7 7 )

9. World Bank, 1974.

10. J.S. Fitch. The Military Coup d'Etat as a Political

Process; Ecuador 1948-66. (Johns Hopkins; 1977). p.150.

11. Fitch, ibid; on which the rest of this paragraph is based.

12. See D. Corkill, "The Political Impact of Oil in Ecuador; the

Rodriguez Lara regime; 1972-6". (mimeo, Manchester; 1977)1
pp.8-9.

13. Fitch, pp.179-81. He adds that "for most officers, Bucaram

was important only as an indication of the failure of the
civilian regime to offer any prospects for anything but a
continuation of some disorganised, ill-planned and frequertly
corrupt politics that characterised the Velasco administra-
tion". (pp.180-1).

14. The most notable of the foreigners were Salas, a Chilean who
had worked with Enap for twenty-four years, and Mariaca
Bilbao who had been both Bolivian Minister of Hydrocarbons
and head of the state oil company, YPFB.

15. World Bank, 1974. pp.8-9.

16. Interview with Lucho Arrauz, Quito, August 1977-

17. These included laws covering water resources, fisheries and

minerals. Jarrin also played an important part in the
drafting of the 1973-7 economic plan. Within the oil
sector, Jarrin also controversially cancelled a refinery
contract awarded by the previous government on the grounds
that no feasibility study had been made.

18. Interview data.

19. Speech to the Universidad Central de Guayaquil, 6 June 1976.

20. Financial Times, 23 February 1973-

21. Interview data.

22. The best financial study of the oil industry is that of R.

Sagasti "Analisis Economico de la Actividad Petrolera en
Ecuador". (Ph.D. Quito; 1974).

23. World Bank, 1973. p.15.

24. Interview data.

25. See Sagasti. op.cit.

26. World Bank, 1976. p.8.

27. Rodriguez Lara. Informe a la Nacion. February 1975.

28. Interview data.

29. Financial Times, 22 December 1977.

30. New York Times, 19 July 1974.

31. New York Times, 21 July 1974.

32. Quoted in El Comercio, Quito, 13 July 1974.

33. See Financial Times, 2 September 1974.

34. Quoted in the New York Times, 29 September 1974.

35. Quoted in the New York Times, 15 August 1974.

36. Jarrin speech to the Universidad Central de Guayaquil,

6 June 1976.

37. See Latin America, 19 October 1973.

38. Quoted in El Comercio, 7 March 1974.

39. Quoted in Ficha de Informacion Socio-Politica, March 1974-

pp.6-7. (Universidad La Catolica, Quito).

40. El Telegrafo, 22 December 1973.

VI. I discussed this question with a visiting academic petroleum

engineer who told me that, although it was true that Texas/
Gulf were exploiting their fields as cheaply as possible,
Ecuadorian fields were such that no permanent damage was
likely to result. It is possible that the Ministry's fears
were somewhat exaggerated.

42. Jarrin, op.cit. 6 June 1976.

43. Interview data.

44. Weekly Analysis, 21 April 1976.

45. Jarrin recalled that, when he went to give a presentation at

the U.N. in 1974, he was snubbed by Ecuador's permanent
officials there.

46. Expreso, 5 November 1974-

47. El Comercio, 6 November 1974.

48. Interview data.

49. Washington Post, 8 January 1975.

50. According to Ecuadorian law, all revenue earned by Texas/

Gulf had to be paid into the Central Bank in Quito, which
would then return what it owed to the companies. The
companies complained that the money was often returned late
and that some of it was not returned at all.

51. Quoted in the Universidad Central, Documentos Fundamentales,

p.1 6.

52. ibid. p.118.

53. El Universo, 22 August 1975.

54. El Comercio, 16 September 1975.

55. See Weekly Analysis, 7 November 1975.

56. As early as 11th February 1973, the NYT reported that "many
businessmen fear that the oil resources will lead to the
application of populist measures, such as agrarian reform".

57. Interview data.

58. El Tiempo, 18 May 1976.

59. 27 July 1976.

60. On March l6th 1976, Vargas met various university and other
representatives and they discussed the formation of "a broad
front, only loosely connected with (al margen de) ideological
positions, in order to support an eventual decision by the
government to take full control of oil developments in the
Oriente". El Comercio, 17 March 1976.

61. Fitch, op.cit. p.169.

62. ibid. p.68.

Editorial Committee

Dr. David Goodman

Dr. George Philip
Miss Daphne Rodger

Forthcoming Papers

2. F.R. Versiani, Industrial Investment in an 'Export1 Economy:

the Brazilian Experience before 1914.

3. W.S. Bell, Peasant Politics in Peru, 1968-1975.

Further copies of this paper and additional information
about the series may be obtained from Miss Daphne Rodger,
Assistant Secretary, Institute of Latin American Studies,
31 Tavistock Square, London WC1H 9HA.