Ecuador announced its withdrawal from the OPEC agreement this week, a move that could shake the foundation of a deal that was already starting to show some cracks.
"We need funds for the fiscal treasury and for that reason we've taken the decision to gradually increase production,” Ecuadorian oil minister Carlos Perez said. Ecuador is running a fiscal deficit equivalent to 7.5 percent of GDP. Low oil prices are really hurting government finances, and production restrictions only add to the pain. With oil prices having posted few gains from the deal since it was implemented at the start of the year, Ecuador decided enough was enough. It needs to produce as much as possible.
Ecuador, by any measure, is not a massive oil producer.... As such, the return to full production (or near full production) probably won’t even be noticeable.
However, it isn’t Ecuador’s production levels that should be concerning. It is the psychological and political impact that a withdrawal from the deal could have on the commitments from other members.... Moreover, Ecuador’s move is even more significant because it has openly declared that it was not even complying with its commitments to begin with, and it will no longer pretend that it is trying to comply
. Typically, members speak to their full faith in cooperation while they quietly cheat. The public announcement from Ecuador that it can’t afford to continue to cooperate will be more psychologically damaging than had it just quietly cheated.