Are Fuel Subsidies Helping Ecuador, or Holding It Back?

For decades, Ecuador has spent billions keeping gasoline, diesel, and cooking gas cheap. The original motivation for these measures was to redistribute the gains from crude oil exports during the 1970s oil boom by keeping domestic fuel prices artificially low. Later, during the economic crises of the 1980s, Ecuador chose to maintain these subsidies rather than remove them, to avoid social unrest. The justification—primarily political—has always been that subsidies help families cope with the cost of living. However, the reality is more complex, and the data tell a different story.

Who Really Benefits?

Studies by the Inter-American Development Bank (IDB) show that most of the money allocated to fuel subsidies in Ecuador actually benefits the wealthiest households. For every US $1.00 spent on fuel subsidies, the poorest Ecuadorians receive between 4 and 14 cents, while the richest receive between 30 and 60 cents (Jorgensen & Soria, 2017). Even in the case of liquefied petroleum gas (LPG), which many low-income households rely on, the benefit is poorly targeted. The subsidy system helps everyone a little — but helps the rich a lot more.

The Cost to the Country

Fuel subsidies have accounted for around 7% of Ecuador’s annual public spending, equivalent to about two-thirds of the fiscal deficit in some years (Jorgensen & Soria, 2017). That money could be used for education, healthcare, or public safety instead. Moreover, subsidies encourage the overconsumption of fossil fuels and make the economy vulnerable to swings in international oil prices.

Why Reform Makes Sense?

1. Fiscal relief: The elimination of the diesel subsidy, announced in September 2025, is expected to save over US $1 billion in 2026 (El Universo, 2025). Although the measure focuses only on diesel, it demonstrates the potential of expanding reform to gasoline and LPG with fair and transparent compensation mechanisms. If that were done, fiscal savings and social benefits would multiply, allowing billions to be redirected toward health, education, and security.

2. Better Social Spending: If part of those savings were allocated to the Bono de Desarrollo Humano (BDH) or other direct transfers, low-income families could emerge better off. A study estimated that if Ecuador eliminated all energy subsidies and increased the BDH by US $46 per month, the poorest households’ net income would rise by 9%, and the fiscal deficit would shrink by US $1.3 billion (Schaffitzel et al., 2020). Today, the BDH stands at US $55 per month, but inflation and the rising cost of living have reduced its real value. The Daniel Noboa administration has promised to expand social benefits and redirect savings toward assistance programs, but it has not yet clarified how the transfers will work, who will receive them, or how they will be delivered.

3. A Cleaner Environment: The logic is straightforward: lower fuel consumption means lower pollution and carbon emissions. However, it is important to note that in a middle-income country like Ecuador, the environmental impact depends on factors such as income distribution, who drives vehicles, and the availability of viable transportation and energy alternatives. The environmental benefits would therefore likely appear gradually, in the medium term.

4. Less Smuggling and Organized Crime: Higher prices reduce fuel smuggling and weaken one of the main sources of income for criminal networks involved in cross-border trafficking and the drug trade. Reducing this leakage not only saves money for the state but also limits the economic power of organized crime in border and port regions.

The Risks and Challenges of Reform

Although the economic arguments are solid, removing fuel subsidies is a socially and politically sensitive measure. Without adequate safeguards, it can trigger discontent, protests, and even policy reversals.

1. Inflation and Higher Living Costs: When fuel prices increase, so do transportation and food costs. The IDB estimated that eliminating LPG subsidies without compensation could reduce the welfare of poor households by up to 5% (Jorgensen & Soria, 2017). To mitigate these effects, cash transfers or fuel vouchers could be implemented to offset higher living costs. Expanding the Bono de Desarrollo Humano or providing targeted assistance can protect the most vulnerable households.

2. Social Unrest and Political Backlash: Ecuador has experienced major protests in 2019, 2021, and 2025, showing how sensitive the issue of fuel prices remains. As mentioned above, the Noboa government has announced compensation programs, but with no clear implementation plan so far. It is essential to recognize that peaceful protest is a democratic right — citizens have legitimate reasons to express concern. However, chaos and violence are not acceptable. Fear and uncertainty must be met with greater transparency, participation, and clear communication. Open and credible communication can also help prevent manipulation by political actors or certain indigenous leaders who might exploit public anger for personal or partisan gain. The state must protect the right to protest while ensuring that legitimate demonstrations are not instrumentalized.

3. Impact on Vulnerable Sectors: Transport operators, rural communities, and small businesses face higher costs before compensation mechanisms take effect. To mitigate this, the government could provide temporary support, could maintain partial subsidies in rural areas, and offer transition assistance for microenterprises.

4. Political Polarization: Reforms can be perceived as imposed or austerity-driven measures. To mitigate this, the government could foster inclusive dialogue and ensure the participation of civil society and local governments throughout the reform process. It should be perceived as something that has not been carried out independently or in isolation.

5. Administrative Challenges: Replacing subsidies with transfers requires robust systems and accurate data. To mitigate this, the government could strengthen social registries, modernize digital payment systems, and enhance monitoring and evaluation mechanisms.

The Road Ahead

Current reforms are part of a broader effort to stabilize the economy. The International Monetary Fund (IMF) has supported these measures and stressed the need to protect vulnerable groups. To succeed, the government must demonstrate that the savings are improving people’s lives, not merely balancing the fiscal accounts.

Conclusion

Fuel subsidies may seem helpful in the short term, but they are a costly and inefficient way to fight poverty. Ecuador now has the opportunity to move from a model of “cheap fuel for everyone” to one of “real assistance for those who need it most.” The success of reform will depend on how it is implemented, with gradualism, transparency, and well-designed social programs. Done correctly, the reform can free billions for social investment, strengthen the economy, weaken organized crime, and contribute to a more sustainable future.

References

El Universo. (2025, 12 de septiembre). Gobierno elimina subsidio al diésel; ahorro proyectado supera los $1 000 millones.

FMI. (2025, julio). Ecuador — Informe del Programa de Facilidad Extendida.

Jorgensen, I., & Soria, L. (2017). Can Government Transfers Make Energy Subsidy Reform Socially Acceptable? BID.

Schaffitzel, F., Sommer, M., Edenhofer, O., & Steckel, J. C. (2020). Distributional effects of energy subsidy reform: An analysis for Ecuador. Energy Policy, 139.