Cost of Fueling the Economy


Economic News

22 Jul 2010
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Thailand's government is having to balance hard economic realities with the need to provide relief to many in the community, especially those in lower-income brackets, as it mulls whether to continue price subsidies for liquid petroleum gas (LPG).

While Thailand has a diverse mix of energy sources, with sizeable reserves of oil and gas, and is making increasing use of other sources such as biofuel, solar and wind, demand is fast outstripping domestic supply.

Though having slipped into recession in the shorter term, Thailand's long-term demand for electricity is predicted to rise by 7% a year over the next two decades. Currently, stations fired by natural gas generate more than two-thirds of the country's electricity. With Thailand's own reserves, estimated at around 330bn cu metres, unable to fully meet long-term demand, the options are either to become more reliant on imports or diversify production capacity.

The Electricity Generating Authority of Thailand (EGAT) is looking to take the second route, following a decision taken in 2007 to make use of nuclear energy. EGAT is overseeing studies on the site for the power station and what technology will be used for the project, of the first steps in a 15-year programme that foresees a 2000-MW nuclear plant up and running by 2020.

However, while the nuclear option is still on the drawing board, LPG has been playing an increasing role in Thailand's energy mix, thanks in part to state subsidies on the fuel. Until recent years use of LPG was mainly confined to household cooking, though this has changed of late.

Last year's record-high oil prices saw many private car owners and companies convert their vehicles to use LPG, while industrial consumption increased. Demand for LPG spiked in mid-2008 as petrol and diesel prices hit record levels, with daily consumption rising by more than 33% to hit 13.5 tonnes.

With petrol prices having fallen back from their record levels of $147 a barrel in July last year, Thailand's LPG usage also declined to around 10 tonnes a day. However, with oil prices starting to rise again, consumers are taking advantage of state subsidies for LPG, currently retailing at less than half the cost of a litre of petrol, pushing daily demand for LPG to nearly 12 tonnes.

The surge in demand has prompted the Energy Ministry to consider measures to double the volume of stored reserves from the present two days of domestic requirements. According to Sirisak Witaya-udom, the deputy director-general for the Department of Energy Business, in its role as regulator the ministry had to ensure energy security.

"We need to be cautious as we had experience last year when LPG demand rose sharply and the supply was short for some time, resulting in considerable damage to the economy and also causing suffering to the people," he said on July 6.

The state's Fiscal Policy Office has proposed that the price cap on LPG be removed, as it adds to the burden on the already stretched budget and distorts the energy market. According to Energy Ministry figures, since April 2008 Thailand has had to import 624,000 tonnes of LPG, having previously been a net exporter. While global prices for LPG are around $516 per tonne, the rate charged in Thailand has been fixed at $332, with net losses caused by keeping the price cap in place being estimated at $232m in 2008 alone.

While costly, the LPG price support has been popular and any move to lift it could incur the wrath of the public, something the government would be loath to do given the recent spate of unrest.

In early July, the finance minister, Korn Chatikavanij, said he was considering extending the price support for LPG, due to be lifted at the end of the month, as well as other measures aimed at providing assistance to low-income families, for between two and five months.

The government is also looking at options that would ease public concerns over increased costs of living, while still reducing the LPG subsidy bill. In June, the energy minister, Wannarat Charnnukul, said that LPG prices should be floated to better reflect global rates, adding that his department had hired a consultancy to work out suitable LPG prices for Thailand. However, the minister said any relaxing of the price cap should only affect transport and industry, with state subsidies remaining in place for household use.

Though the government is keen to cut costs, it also does not want to stifle economic recovery. The suggested two-month extension would be based on projections of an economic recovery in the fourth quarter, Korn said. With GDP predicted to contract by at least 3.5% this year, maintaining a wider price support for LPG could prove to be an effective fiscal stimulus tool, helping the economy on its way to recovery.

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