LPG subsidies exhaust Thailand's supply of natural gas:
Shortages, queues, possible hoarding,
no incentive for efficient energy use
By Jon Fernquest |
In April Thailand became an importer of LPG.
Thailand used to be a net exporter of LPG that earned the country valuable export revenue. Subsidies put an end to this.
LPG subsidies have made the price of LPG much lower than the actual market price determined by international commodity markets.
This low price has motivated many who rely on LPG for their business to change to LPG. Low-priced LPG has also been smuggled into neighboring countries:
"At 18.13 baht a kilogramme, LPG in Thailand is lower than the actual market price by 30 baht/kg and about 4-5 times cheaper than petrol; thus more vehicle owners will switch to using LPG, and smuggling of LPG into neighbouring countries where it is more expensive, will continue."
April was the turning point. After the switch to LPG was made by a large proportion of taxis, trucks, and other heavy fuel using vehicles, Thailand became an importer rather than exporter of LPG. Now the subsidiser, whether it be PTT or the Thai government, will have to pay international market prices for LPG. This could be expensive in the long run.
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Last week, the rumour was that the government was going to freely float the price of LPG so it could move in line with the international market prices Thailand now has to pay. The result was an LPG shortage, rumours of hoarding, and long lines at gas stations. (See photos on right).
Bangkok Post Energy expert Boonsong Kositchotethana assesses the situation in today's article. Here is the article in full:
COMMENTARY
It's wrong to subsidise fuel
BOONSONG KOSITCHOTETHANAWednesday July 02, 2008
Consumers of subsidised fuels like liquefied petroleum gas (LPG), compressed natural gas (CNG) and diesel fuel deserve, to a certain extent, some scorn for their role in driving up fuel prices.
But politicians should receive more blame in the first place for favouring a plan by making oil and gas prices in Thailand artificially lower than actual cost, in an unsustainable policy aimed at making easy political gains.
The reality is that when prices are capped or subsidised - occurring mostly in developing countries like ours - consumers don't feel the same pressure to conserve than their counterparts elsewhere do. Because of distorted prices, petroleum consumption keeps rising in subsidised nations while oil use elsewhere is falling.
Figures from the International Energy Agency (IEA) clearly show what is happening: oil use in industrialised countries represented by the Organisation for Economic Cooperation and Development was down in March by 2.8% year-on-year in the OECD's American and Pacific region and down 2.3% in Europe.
In sharp contrast, petroleum consumption in non-OECD was projected to rise 3.7% this year, reflecting the rise spurred partly by strong economic performance in Asia and the Middle East, and also by the price protection for consumers in several developing states.
The consumption growth in the non-OECD group, which represents 44% of global use, is enough to offset the OECD decline and leave a net projected worldwide oil consumption of 1.2%.
In Thailand, for instance, we see that consumption of LPG, which is priced 170% below cost, is jumping, especially in the transport and industrial sectors which are aggressively taking advantage of the subsided fuel. The two sectors now account for nearly 35% of Thailand's total LPG consumption and have recorded growth of 12-17% over the first five months of this year, according to the Department of Energy Business.
At 18.13 baht a kilogramme, LPG in Thailand is lower than the actual market price by 30 baht/kg and about 4-5 times cheaper than petrol; thus more vehicle owners will switch to using LPG, and smuggling of LPG into neighbouring countries where it is more expensive, will continue.
Exploitation of the subsidy regime by these sectors turned Thailand, which has been a net LPG exporter, to become an importer in April. The LPG import volume is conservatively estimated to top 300,000 tonnes for 2008 and nearly one million tonnes next year if the subsidy remains in force.
Basic economics states that demand and supply are normally correlated. Prices will increase when demand is high and supply is limited. With demand continuing to surge like this, it is highly unlikely that we will see oil prices being tamed, let alone reduced.
And chances are that oil prices could rise to as high as $170/bbl in the coming months, from above $140 a barrel now, as Chakib Khelil, president of the Organisation of Petroleum Exporting Countries (Opec) has warned.
Or worse, oil prices could test the $200/bbl level over the next five years and is most unlikely to sink below $100, as analysts have envisaged. Keeping subsidies or cutting fuel taxes counters the bid to improve energy efficiency and reduce consumption which eventually would lead to lower fuel prices.
By any measure, Thailand's energy efficiency has been poor. Our primary energy consumption per GDP has been rising, while the general global trend has been flat to decreasing.
The ratio of energy use to GDP in the last five years was 1.1:1, a sharp contrast to other countries where the GDP numbers are higher than energy consumption proportion.
Policy-makers must dare to risk public discontent in a proper way and stop spoiling the consumers, and consider reforms to subsidies that are draining their coffers and inflating demand despite record price increases. The government should not intervene politically on oil prices.
Alternatively, authorities may consider using the tax surplus from higher oil prices to help selected vulnerable consumers - fishermen, farmers and truckers.
It's not enough to point the finger at big oil, Opec and speculative traders or the skyrocketing oil prices; consumers need to do their part and economise on their energy use, and learn to appreciate and pay for the true value of oil.
Boonsong Kositchotethana is Deputy Assignment Editor (Business), Bangkok Post.
(Source: Bangkok Post, op-ed section, page 9, Boonsong Kositchotethana, temp-link)
Vocabulary:
subsidise fuel - pay part of the cost of the fuel, so people buying the fuel are only paying a part of the cost
prices are subsidised - part of the price is paid by the government (or by PTT on behalf of the government in this case)
prices are capped - prices are limited, cannot rise higher than a limit
an incentive - a reward to encourage people to do something, a reward for behaving and acting in a certain way (See glossary)
distort - changed from the true value, made unclear
distorted prices - actions make prices different from market clearing prices where supply equals demand
making oil and gas prices in Thailand artificially lower than actual cost - an oil or gas subsidy lowers the price to the consumer below cost to producer
Liquefied Petroleum Gas (LPG) - gasoline substitute, less common worldwide than CNG below, but more popular in Thailand because of cheaper vehicle conversion costs (See Wikipedia)
Compressed Natural Gas (CNG) - a substitute for gasoline, diesel, or propane fuel, more environmentally clean alternative and safer in the event of a fuel spill, natural gas is lighter than air, so it disperses quickly when leaked or spilled, used especially by taxis, buses, and trucks (See Wikipedia)
diesel fuel -
scorn - show contempt, believe to be ridiculous, worthless, and not good enough
unsustainable policy - a policy that can't be maintained over long periods of time
pressure to conserve - people forced to use less
aggressively - with force, determination, and eagerness to succeed (See glossary)
take advantage of Y - make good use of situation Y (while you can, while the situation lasts)
smuggling - bringing goods into a country illegally
exploitation - use unfairly for one's own gain (See glossary)
a subsidy regime - a set of subsidies that a government policy has put in place
exploitation of the subsidy regime - use the subsidies un fairly for one's private gain (for example, smuggling the fuel out of the country for a profit)
tamed - when a wild thing is made controllable
envisaged - imagined as likely to happen in the future
analysts - people who know a lot about a subject, specialists experts
analysts have envisaged - what experts thought would happen in the future
efficiency - waste little time, energy and resources in doing a task (minimize time, energy and resources in performing a task) (See glossary)
improve energy efficiency - use less energy to do the same work
dare to - do something courageous and brave
risk public discontent - do something that the public might be unhappy about
spoil - give someone everything they ask for
spoiling the consumers - give consumers everything they ask for
a coffer - a box to keep money
draining their coffers - using up all your money
intervene - becoming involved in a situation and trying to change it (See glossary)
intervene politically - use political power to intervene and change things for voters (constituency)
a tax surplus - extra money from taxes collected
selected consumers - not all customers, a group of customers selected for some reason
vulnerable consumers - consumers who are easily hurt
Organisations
International Energy Agency (IEA) - (See Wikipedia)
Organisation for Economic Cooperation and Development (OECD) - (See Wikipedia)
Organisation of Petroleum Exporting Countries (OPEC) - (See Wikipedia)
