Diesel subsidy leaves many suffering in its wake

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Diesel subsidy leaves many suffering in its wake
By Achara Deboonme
The Nation 2011-03-10

The government's diesel subsidy is an issue that generates much intense debate.

On one hand, it has a psychological effect, convincing the public that they will not be hit by the direct or indirect impacts of higher oil prices. On the other hand, it distorts the market mechanism and promotes poor behaviour among consumers, at the cost of others.

Prime Minister Abhisit Vejjajiva believes the measure is appropriate, given that transport companies often push for servicefee hikes when diesel exceeds Bt30 per litre.

In response to the policy, the Energy Policy Administration Committee has held 10 meetings this year, the latest one having taken place on Tuesday. Discussion was mostly centred on oil prices on the back of renewed spikes following the political unrest in the Middle East and North Africa. In effect, the committee has so far approved an overall diesel subsidy of Bt5 per litre. Without the subsidy, the product could retail at Bt35 per litre, not Bt29.99 as at present.

Suffering greatly from the measure are the oil retailers. Even with the subsidy, there is little for them to gain from every litre of diesel sold, although based on operating costs, the marketing margin should be Bt1.70.

According to PTT - the operator of the largest fuel station network with more than 1,300 outlets nationwide - today's diesel margin is Bt1.08, rising from 83 satang only a day earlier, purely because of the fall in global oil prices in recent days.

Bangchak Petroleum president Anusorn Sangnimnuan said yesterday that the company was posting Bt3 million in daily losses due to the low margin. As the average diesel margin has been Bt1 per litre so far this year, Bangchak's loss amounts to about Bt200 million so far. He expects the intervention to continue after April, ahead of the general election. Bangchak would then have to raise its diesel price, as it has other stakeholders aside from the government to answer to, he said.

The government's intervention is the main reason driving down margins and forcing retailers to crosssubsidise the cost with revenue from nonoil business. Prajya Phinyawat, chief operating officer of PTT's downstream business, which includes retail operations, said nonoil business revenue in the next 10 years should be half of total sales revenue. This compares with just 10 per cent at present.

Another major group of sufferers is petrol consumers. As oil retailers try to squeeze income from everything not related to diesel, which accounts for 70 per cent of oil sales, they keep on raising petrol prices to maintain the margin at Bt1.70 per litre. Yesterday's 50satang increase in petrol prices reflects this fact, as global oil prices have eased in recent days.

Notably, due to the government's subsidy programme for liquefied petroleum gas, which costs about Bt1.4 billion monthly, petrol consumers are now effectively singled out as the sole group responsible for paying for that, while diesel consumers enjoy their own subsidised product.

As the Oil Fund is digging into its pockets to finance the diesel subsidy, one way to neutralise the cost is to maintain oil prices at high levels when global prices ease. Petrol consumers are then the ones to suffer throughout the period. But worse still would come if petrol margins were to be raised beyond a reasonable level in order to cope with decreasing diesel margins.

Last but not least, suffering most of all as a result of the diesel subsidy are all Thais. Without the measure, oil imports should drop and improve the nation's trade balance. Moreover, oil retailers would stand to operate their oil business at a reasonable profit, while additional income from nonoil business would add to the profit and this would result in higher taxes being paid to the government. Without the subsidy, the Oil Fund would enjoy an increased cash flow, and the higher sum could be shifted towards investment projects for the sake of all.

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BoT chief fears inflation may surge once subsidy ends
TNA 2011-03-10

BANGKOK, March 10 – Bank of Thailand (BoT) Governor Prasarn Trairatvorakul on Wednesday voiced concern that Thailand's inflation rate might increase by a further 0.5-1 per cent once the government’s subsidy of public utility charges to householders and public transport to ease the cost of living comes to an end.

He said the baht, which is at its strongest point in two months now, continued to move in conjunction with other currencies in Asia although it had earlier weakened most when compared with other currencies early this year, which led to the currency speculation.

Mr Prasarn said the Monetary Policy Committee (MPC) decision to raise the policy interest rate by 25 basis points was not a key factor behind the strengthening of the baht.

The currency appreciation was attributed to capital inflows into the region where the economy had grown continuously.

The BoT chief said he believes the stronger baht will not negatively affect the country’s exports, which are forecast to grow 10 per cent this year.

He conceded, however, that continuing rising inflation might obstruct exports because higher inflation stems from rising product prices, which could impact consumer purchasing power.

However, Thailand should not be adversely affected because its economic growth is partly driven by the domestic consumption.

Mr Prasarn said the Abhisit government’s measure to help reduce the cost of living for the public is due to end soon. It might result in inflation rising further by 0.5-1 per cent, but it must take into account the inflation rate at that time as well. (MCOT onlne news)