Ecuador and the Paradox of Cheap Fuels That Ended Up Being Too Costly

Abstract

This study analyzes the historical trajectory of fuel subsidies in Ecuador, from their establishment in 1974 to their partial and total elimination in 2024–2025 under the government of Daniel Noboa. Over five decades, this policy became entrenched as a measure socially perceived as a right, yet economically unsustainable, regressive, and a source of multiple distortions. Results show that the main beneficiaries were not vulnerable sectors, but rather middle and high-income households, heavy transport, and productive sectors, as well as illicit activities such as smuggling. The elimination of the diesel subsidy in 2025 frees up fiscal resources equivalent to 2–3% of GDP, strengthens debt sustainability, and reduces smuggling; however, it generates inflationary pressures on the basic food basket and risks of social conflict. The analysis highlights the dilemma between economic sustainability and political stability, concluding that the viability of the reform will depend on the state's capacity to target compensation, ensure transparency in resource use, and maintain social dialogue.