Thailand Fuel Troubles: From Subsidies to Substitution

Concern over the impact of rising fuel prices on the Thai economy has prompted a two-pronged intervention, which seeks to stabilise diesel prices through subsidies on the one hand, as well as accelerate the adoption of bio fuel alternatives to reduce dependence on fossil fuel on the other.
While these may appear to be rational responses to address inflation, both approaches are not without problems, and if international crude oil prices continue to rise, there is a danger that Thailand’s CPI (Consumer Price Index) may rise above GDP growth before the end of the year.

The Trouble with Subsidies: Thailand’s Oil Fund
*
To stabilise prices in the short-term, the state is currently subsidising the cost of diesel from Thailand’s Oil fund to keep pump prices at just below 30 Baht a litre. However, worldwide events since the subsidy was implemented in January, have driven up the costs of this subsidy from the projected 5.4 billion baht per month announced in December to an actual 7.4 billion baht per month. This is rapidly eating away into the reserves of the oil fund, prompting concerns that the entire fund may be depleted by early April. According to a report from the Ministry of Energy, the Fund now only has 2.1 billion baht left.

The Trouble With Substitution: Alternative Fuels
While Thailand has a good track record in terms of promoting alternative transport fuels, it is doubtful whether gains can be made quickly enough to counter inflationary pressures.
The use of dual fuel hybrid passenger cars, running on petrol/LPG, or petrol/electricity, is more widely established than most other countries, and the share of bio fuel (and palm oil in particular) has also markedly risen over the past 5 years, but the overall market share of alternative fuels is still relatively small. Moreover, for the transport of goods in particular, dependence on diesel remains key, and while it may be politically and economically desirable to reduces this by encouraging bio fuel as a substitute, this is simply not practical in the short-term.
Indeed, while the Ministry of Energy has been encouraging bio fuel producers to increase production, a national shortage of cooking oil has now forced it to prevent the purchase of raw palm oil for fuel purposes.

Where has all the Palm Oil gone?
As the world’s third largest producer of palm oil, Thailand is one of the last places where one would expect palm oil rationing, but this is exactly what happened last week, with customers queuing to buy their quota of one bottle of cooking all per person. Predictably, this has resulted in a political furore, with allegations of hoarding and speculation against some companies and incumbent MPs, but truth of the matter probably lies closer to the fact that most of Thailand’s palm oil is already being directed to energy uses, and that this cooking oil shortage was ultimately examined by some other well-intentioned but ill-conceived government intervention. For Thailand caps the retail price of cooking oil at $47 Baht a bottle, a price which is too low to allow producers to make a profit, a price which can only be maintained by subsidising imports of cooking oil, and thus a price which encourages exactly the sort of hoarding the government is trying to prevent.


* Thailand’s Oil Fund was established in 1979 as a response to the Oil Shocks to provide a monetary reserve for stabilising fuel pump prices, and it is financed from a special Oil Fund Tax levied on business. Since fuel prices were liberalised in 1991, the fund has principally been used to promote other political objectives (such as use of LPG).

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