Thwarted markets in everything

by on January 5, 2011 at 4:44 pm in Economics, Law | Permalink

Or so I predict:

Ecuador has taken a decision that no other oil-endowed country has so far considered. It will refrain from developing the reserves beneath Yasuni national park and leave the forest untouched, if the outside world will compensate the country with half the money it would thereby forgo.

Extracting the oil would yield $7.2bn for Ecuador’s government. Rafael Correa, president, is asking for $3.6bn over 13 years in return for leaving the reserves in the ground.

I could be wrong about my prediction of the outcome; if not the inability of the international community to do such deals does not augur well for our future: "…unless the first $100m arrives by the end of this year, the proposal will die."  So far some token amounts have been raised, most of all from Spain.

angus January 5, 2011 at 12:57 pm

I don't see how this could work. You start giving Correa the money, then in 13 years when he or his successor are paid in full, they commence drilling. What does Spain do then, invade?

dg January 5, 2011 at 1:09 pm

How is this a thwarted market? Seems like a straight-forward extortion transaction to me: "$100m now and $3.5b later or the forest gets it." And, of course, dirk is right on the money with his projection.

minderbender January 5, 2011 at 2:15 pm

And even worse, once you've issued a threat like this, then it becomes costly (in a reputational sense) not to drill, even if the project makes no sense on a purely domestic basis.

Sigivald January 5, 2011 at 2:24 pm

What Angus said.

Why should the rest of the world trust this long-term commitment?

I don't even necessarily trust the US government – which is notionally accountable to me – to do things it said it'll do once, that won't cost it much. Trusting Argentina (or any state, really) to forgo billions in income indefinitely because of a one-time payment?

Pull the other one, it's got bells on.

(And how, even if the promise was trusted enough to consider it, would enforcement work? What's the penalty structure?)

Newt January 5, 2011 at 2:44 pm

You could put the money in an overseas trust arranged to pay its interest to Ecuador's social insurance fund. Then include a clause in the trust contract paying back the principal in the event of default.

Of course that creates an option that the Ecuadorianos retain to pay back the trust fund and plunder the nature reserve. Once oil prices are high enough, they're almost sure to do it.

Can we imagine anywhere in the world where a significant amount of oil will survive untouched in the face of $200 per barrel oil, as is likely soon? How about $500 per barrel, which is not unlikely in a generation or two? The Arctic Refuge maybe?

Indy January 5, 2011 at 3:10 pm

How about a complete sale of the property for a cool $10B's, including sovereignty. Give it to the UN help in perpetual trust as the first "International Park", with free entrance for all Ecuadorians forever.

Or maybe a perpetually-extendable renewable lease – like Guantanamo.

Anyway, what about the other side of the bet. If Ecuador develops it right now, then total global supply goes up and prices go down, which benefits me. The international community should be willing to pay them not to keep it in the ground, but to pump it now, right?

OneEyedMan January 5, 2011 at 3:13 pm

The mechanisms proposed by Rachel and Newt might work but isn't paying a little to defer such development a better solution than paying a lot for pledge to never develop it? The price of delaying development for year should just be that opportunity cost of delaying for a year. That should be much cheaper than permanent ban and I think it is more incentive compatible.

Environmentalists might get lucky and disruptive technology could massively depress the price of oil, just as whale oil prices collapsed after the development of petroleum extraction. If not, the Ecuadorians might eventually get rich and want to preserve it for themselves. If not, they were likely to eventually re-neg anyway, and at least the environmental damage was delayed some.

Mike January 5, 2011 at 3:53 pm

This could bode well for Charter Cities and the like. While perhaps not appealing in terms of environmental policy, the sale of land & sovereignty to a foreign entity could work out better for libertarian goals.

A Negotiation between a Random Socialist / Crumby Nation and some Rich Libertarians:

Nation: "We'd like you to pay us to discontinue the governance and consequent degradation of this slab of land."

Libertarian 1 (played by Wallace Langham): "We're listening, but how would we know that you'll keep your end of the agreement?"

Nation: "Well, we could use the model established by the non-petrol deal in Ecuador. That succeeded due to the mechanism of 3rd party backing and [additional good ideas not yet worked out by 2011]. We haven't touched that nature reserve and it's thriving, both in economic and environmental terms; and the credit rating of that government body is on par with most developed nations!"

Libertarian 2: "Good point. That model has, to date, proven to be tenable. Since we know that you thugs really need the money, we want you to sweeten the pot"

Nation: "How?"

Libertarian 2: "Well, we're rich libertarians and we've grown tired of investing our wealth in stocks and commercial real estate. We'd like to try investing in a city that we will call 'Amagi'."

Nation: "Yeah we don't care what you call our useless slab of land. Is that all you want? Some goofy name? And that city will never work. If it were a good place for a city, its residents wouldn't be poor."

Libertarian 1: "Well since you're so sure our city won't work, you'll agree that we ought to be able to govern for profit. That wouldn't cost you anything."

Nation: "We accept."

(In future): Prosperity ensues.

Jim January 5, 2011 at 6:28 pm

Let's ask all the US corporations who invested millions in South America to extract minerals (etc) — only to see their returns "nationalized" — what they think of this proposal.

anonymous January 6, 2011 at 12:01 am

Rachel,

Trusting Ecuador is a big problem.

They very recently defaulted on bonds that they had the capacity to pay with ease and without hardship, on the grounds that financial commitments entered into by a previous government could simply be declared illegitimate. That sets a bad precedent that is entirely relevant here.

They now propose to collect revenue as though an oil company were exploiting the resource, but without actually depleting the resource. The undiminished entirety of the oil will still be available for extraction by some future government unconstrained by the promises made by the current one.

Craig January 6, 2011 at 2:12 am

Is possible that the Ecuadorian government never expects the money to show up? It seems to me that this is political posturing for either domestic or international purposes.

Finley Edwards January 6, 2011 at 5:41 am

It should be noted that Correa has a Ph.D. in Economics – from the University of Illinois at Urbana-Champaign.

randomizer January 6, 2011 at 10:53 am

Like they wouldn't renege during the very next administration. You'd have to be a fool to offer money on this deal. It's a joke on multiple levels.

andre January 8, 2011 at 11:26 am

Can Equador really commit its future governments to this?

techreseller January 10, 2011 at 11:36 am

Econ 101 or 102. Tragedy of the Commons. While nominally Ecuadorian territory, the demand for the oil and the revenues it gives to the nominal owner of the land above, it will be drilled. Some how, some day.

Comments on this entry are closed.

Previous post:

Next post: