Recent price controls in Thai energy policy
the right policy?
By Jon Fernquest |
Is the policy that gives voters immediate gratification always the right policy?
Can a policy make people feel good in the short-run while leading to disaster in the long-run?
(See photo on right of a large ocean-going LPG tanker transporting LPG)
Tricky financing for borrowers in the US who shouldn't have borrowed in the first place led to? ....The Subprime Crisis and an international financial system wobbling near collapse.
To take a less extreme example from Thailand. In front of every school in Thailand from about 2 to 4pm there is a huge traffic jam of mini-vans picking up children and delivering them to their homes. In the old days there were one or two school buses. Subsidized fuel may change everyday behaviour in wasteful ways that are barely noticeable.
Today's Bangkok Post commentary by Deputy Assignment Editor (Business) Boonsong Kositchotethana takes a critical look at recent post-election policy reversals in energy policy and how this may have disastrous consequences for Thailand down the road.
(See photo below of workers installing LPG tanks in the back of taxis)
Here is the article in full:
COMMENTARY
Mishandling energy policy
BOONSONG KOSITCHOTETHANAWednesday March 26, 2008
Energy Minister Poonpirom Liptapanlop needs to demonstrate better judgement, insight, foresight and good governance as a maker of this country's energy policy. Her decision to reverse the policy of her predecessor Piyasvasti Amranand to float the local LPG price, by capping it at 18.13 baht/kg; and reinstating the subsidy for diesel fuel, at 90 satang/litre, is not the right way to solve national energy problems.
|
Despite being surrounded by energy experts at the ministry from whom she can obtain good advice, Lt-Gen Poonpirom has chosen to take the easy, stereotypical decision which only repeats the serious mistakes the Thaksin Shinawatra administration committed. The Thaksin government mismanaged energy policy by subsidising pump prices between Jan 2004 and July 2005, causing 92 billion baht in deficit to the Oil Fund. That debt was cleared last December, two years ahead of schedule, as former Energy Minister Piyasvasti insisted on consumers embracing the reality of the oil market and stepped up contributions to the Oil Fund at times of low global oil prices.
What the new Energy Minister has done is only a political gimmick to boost the image of the Samak Sundaravej administration. The 52-year-old wife of seasoned politician Suwat Liptapanlop, seems too preoccupied with producing something swiftly to show her constituency in Nakhon Ratchasima that she is delivering on promises made during the campaign, that she would tackle soaring energy prices. She ignored repeated warnings from senior energy planners that the petroleum price distortion and interference was bad for the economy and that the public would eventually need to pay the price.
By defying the reality of the global petroleum value through price distortion, even for the short term until July (as she claims), Lt-Gen Poonpirom is not doing anything meaningful to solve problems.
First, the size of the subsidy is not big enough to produce any significant effect on costs, though it may give consumers the illusion that all is well with diesel fuel prices. The ministry's continued inclination to use the state-controlled energy group PTT to intervene in local petroleum prices poses another serious problem. The PTT has again and again been made to bear the brunt of this populist policy. From last month till March 13 alone, it racked up about one billion baht in losses for such conduct, adding to nearly three billion baht in losses last year due to delays in raising prices.
Other oil firms are suffering, too. Bangchak Petroleum incurred a loss of 500 million baht last year, while Shell lost more than 400 million baht so far this year because it was unable to increase prices fast enough to match global benchmarks. More and more service stations, especially in rural areas, are closing down or are having supplies from oil companies curtailed, as oil firms try to limit losses as a result of having to sell products at prices below cost.
Clearly, this petroleum price intervention and subsidy are damaging the structure of the Thai oil market, further dampening the philosophy of free market and investment climate in the eyes of foreign investors.
Lt-Gen Poonpirom's decision to cap LPG prices will also mean that Thailand will have to import LPG for the first time in many years, beginning next month with 20,000 tonnes, as subsidies have sharply pushed up consumption by motorists and industrial plants.
Without the subsidies, LPG prices would have been around 30 baht/kg.
The subsidies for LPG were ideally meant for household use only, but price incentives have encouraged usage in the transportation and industrial sectors.
LPG usage in the transport sector surged 24.6% in 2007 and consumption by industries rose 17.8% , while household use increased by only 9.5%.
The new Energy Minister's LPG price policy will only fuel LPG misuse by unintended parties as well as encourage greater smuggling of LPG to neighbouring countries where prices are much higher.
As of Feb 11, LPG was priced at 38 baht/kg in Cambodia, 36.15 baht in Vietnam and 33.60 baht in Laos.
Her request for the PTT to shoulder the huge disparity between capped local price import (US$320 a tonne) and actual import costs ($822 in April) should prompt PTT's shareholders to react.
It is imperative that Lt-Gen Poonpirom continue with the unpopular but pragmatic fundamentals laid down by her predecessor. She should be receptive to sound advice such as devising a scheme to turn all public transport including buses, taxis, river and klong boats, into CNG-fuelled, by using the Oil Fund to cover the conversion costs.
That is a much more meaningful way to make use of the Oil Fund, rather than subsidising oil and LPG prices.
Boonsong Kositchotethana is Deputy Assignment Editor (Business), Bangkok Post.
(Source: Bangkok Post, op-ed section, 26-03-08, BOONSONG KOSITCHOTETHANA, temp-link)
Vocabulary:
immediate gratification - giving immediate pleasure and satisfaction (See Wikipedia on deferred gratification and the marshmallow experiment)
ocean-going - traveling on the ocean, not rivers
a tanker - a very large ship used for transporting oil, gas, and other liquids (probably not milk)
never should have done it in the first place - emphasises that they never should have done it
the Subprime Crisis - an ongoing economic crisis that started with liquidity problems in the banking system from home foreclosures in the US which accelerated in late 2006 and triggered a global financial crisis during 2007 and 2008 (See Wikipedia)
down the road - in the future
mishandling - dealt with a problem in the wrong way
judgement - an opinion reached after thinking carefully
demonstrate better judgement - show that you can think more carefully before making decisions
insight into Y - gain an accurate and deep understanding of issue Y
foresight - a person's ability to know what will likely happen in the future
governance - the making of decisions that define expectations, grant power, or verify performance in an organisation, this can include government agencies as well as companies (See Wikipedia on governance)
a predecessor of Y - the person who had Y's job before Y had the job
reverse the policy of her predecessor - the new person in the job changes the policy to be the opposite of the previous policy
float a price - let a price move freely up and down following market demand and supply
cap a price - set a price limit, a highest price that market prices are not allowed to move beyond
float the local LPG price - let the local LPG price move freely with supply and demand in the market
reinstating X - restore X, start using X again, after not using it
a subsidy - money paid by the government to help reduce the cost of a product or service
reinstating the subsidy - start providing the subsidy again, after not providing it
stereotypical - the simple ideas that people have about a person or thing (for example, crying is not part of the stereotypical image of men in many cultures)
pump prices - gasoline (petrol) prices at the gas station
a deficit - money spent greater than money received
the Oil Fund - a monetary reserve kept by the Thai government used to maintain domestic retail price levels at a set ceiling in times when global petroleum prices soar, subsidizing domestic oil producers and importers (Source)
step up - increase intensity of activity (for example, step up efforts to enforce the law)
stepped up contributions to the Oil Fund - increased money added to the fund for subsidizing oil prices
embrace - accept, support, believe in with enthusiasm
embracing the reality of the oil market - accept that the market works in a certain way and not try to work against this
a gimmick - doing something strange and unnecessary to attract attention and publicity
preoccupied with Y - thinking about Y so much that you forget other important things
a constituency - the people who elect a political candidate
delivering on promises - when someone who was elected fulfills their campaign promises
campaign promises - promises made to voters during an election campaign
fulfill a promise - do what you said you would do when you promised
tackle - solve a problem
petroleum - oil
petroleum price distortion - when the price of petroleum is not the true market price determined by supply and demand (people change their behaviour and use more fuel than they would if they faced the true price)
petroleum price interference - when the government uses subsidies or price controls to control or influence petroleum prices
give the illusion that Y - make it look like Y is true, but it isn't
an inclination - a tendency
poses another serious problem - creates a problem
bear the brunt of X - to be the one who suffers the most from something unpleasant thing X
racked up losses - lost a lot of money over time
incurred a loss - lost money
global benchmarks - the standard global price that everyone in the world faces
curtailed - stopped
shoulder Y - accept the responsibility for Y
a disparity between X and Y - a noticeable difference between X and Y
shoulder the huge disparity between X and Y - pay for or subsidise the difference in prices
it is imperative that Y - it is really important that Y should be done
pragmatic - dealing with problems in a practical way, not theoretical or abstract
the fundamentals - the basics of how something works (See glossary)
laid down - authorities officially state rules and what people must do
laid down by her predecessor - the the policies that the person who had the job before her pursued
devising a scheme to X - creating a plan or system to achieve goal X
