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Hike in diesel subsidy threatens oil fund

By The Nation, Agencies

Could run dry in 23 days after yet another move to keep Bt30 ceiling that costs Bt302m a day

Thailand has raised the diesel subsidy to Bt5 per litre amid worries that at the current rate the Oil Fund's reserves will be depleted in 23 days.

Once the Energy Policy Administration Committee's resolution takes effect today, the Oil Fund will need to spend Bt302 million a day to keep the diesel price below Bt30 per litre, up from Bt247 million earlier, or at a cost of Bt9 billion. Since the price-freeze policy started on December 17 until yesterday, the fund had spent Bt9 billion for the purpose.

The net reserves are consequently down to Bt7 billion and the amount will not last until the end of this month, said Energy Minister Wannarat Charnnukul. Two options are raised for discussion at the prime minister-chaired National Energy Policy Committee - a cut in the oil excise tax or lifting the diesel price ceiling.

"The government promised a budget allocation for the price freeze but now there is no clarity how the burden will be financed," Wannarat said. Earlier, there was a plan to use part of the petroleum royalty fee to subsidise the price of liquefied petroleum gas (LPG), so as to raise the Oil Fund's capacity to freeze the diesel price. According to the minister, that is possible only with an amendment that might take one to two years from now.

The Oil Fund now sits on cash of about Bt15 billion. Still, it is liable to finance the Bt1.2-billion programme to convert LPG-fuelled taxis to natural gas for vehicles. Monthly, it needs to subsidise the NGV price by Bt2 per kilogram, or Bt400 million, and to handle the differential of domestic and international prices of LPG of about Bt2.2 billion.

The committee yesterday decided to raise the subsidy by 50 satang per litre, as oil spikes continue due to political upheaval in Libya and Middle Eastern countries. Dubai crude was US$109 (Bt3,325) per barrel yesterday, while refined diesel in Singapore cost nearly $130 per barrel.

Pissawan Atchanapornkul, chairwoman of Shell Company of Thailand, urged the government to consider lifting the ceiling from Bt30 per litre.

"The rise would help retailers, as this would improve the marketing margin, which is now below Bt1 per litre, though the government agrees that the appropriate level is Bt1.70. The price freeze is good to help lower the cost of living, but amid changing external factors there should be a review," she said yesterday.

There is no sign that rises in the price of oil will stop soon. Technical analysis by Glen Ward, head of retail derivatives at London Capital Group Holdings, shows that Brent crude for April settlement, now at $116.20, may advance past $119 a barrel as prices continually surge above ranges and moving averages.

The nine-day, 14-day and 40-day moving averages "are all pointing north", Ward said.

This is despite US Treasury Secretary Timothy Geithner's speech on Thursday in which he said that the world could pump enough extra oil and has enough stashed in reserve to limit price shocks from sustained turmoil in the Middle East. International Monetary Fund spokeswoman Caroline Atkinson said at a news briefing on the same day that the IMF was worried about rising food prices, especially as they affect the poor and most vulnerable people. Indices by the United Nations' Food and Agriculture Organisation show that food prices in February rose the highest in 20 years. The FAO warned that oil prices could push food prices higher.

"We're extremely concerned about rising food prices … It's important that people who are most vulnerable should be protected rather than products subsidised," she said.

Beyond rising food prices, Atkinson pointed to building inflation in some rapidly growing emerging economies. Some emerging countries are "getting to the point of potential overheating, and therefore central banks have been quite appropriately beginning to tighten monetary policy", she said, citing Brazil's monetary tightening.

Thailand is also expected to raise the policy interest rate at next Wednesday's meeting.

-- The Nation 2011-03-05

[Pib]

The current govt raised the fuel tax by another 2 baht/liter about 6 months to raise more taxes...did it when oil prices were down...additional taxes needed to help offset a budget deficit. Funny how the govt continues to push away from rescinding that tax increase...taxes can be intoxicating to a govt. Rescinding the recent 2 cent additional tax would take some pressure off the oil fund reserves used for a variety of fuel program related subsidies. Of course taxes fund the oil fund reserves so it's all a big Catch 22. Subsidies work good to smooth out short term rises in prices but rarely can they work for the long term to keep prices down. With the elections coming up this year I expect the current subsidies will continue through at least election day...after that, it's anybody's guess.

Edited March 5, 2011 by Pib

[tragickingdom]

The entire idea of subsidizing diesel is outright absurd. It is high time that taxes would be levied upon old diesel engines. If the idea is that the poor need to be helped, it makes more sense to subsidize motorcycle fuel anyhow. By sponsoring diesel Thailand's old fashioned companies have no incentive at all to modernize and catch up with the rest of the world.

[cloudhopper]

The current govt raised the fuel tax by another 2 baht/liter about 6 months to raise more taxes...did it when oil prices were down...additional taxes needed to help offset a budget deficit. Funny how the govt continues to push away from rescinding that tax increase...taxes can be intoxicating to a govt. Rescinding the recent 2 cent additional tax would take some pressure off the oil fund reserves used for a variety of fuel program related subsidies. Of course taxes fund the oil fund reserves so it's all a big Catch 22. Subsidies work good to smooth out short term rises in prices but rarely can they work for the long term to keep prices down. With the elections coming up this year I expect the current subsidies will continue through at least election day...after that, it's anybody's guess.

Sovereign governments that print their own currency do not need tax revenues for funding. Taxes (along with their opposite - subsidies) are merely tools of the state to regulate social behavior and reward their political power base.

[lannarebirth]

The diesel subsidy was one of the most foolish, ineffective and expensive of the Thaksin administration's policies. My recollection is they ran up a 70 Billion baht tab in only a few months. I'm sorry to see this administration repeating those same mistakes. Better that people and companies modify their behaviour and usage in light of rising prices.

[gotlost]

It only benefits those in Bangkok. Diesel has been over 30 baht per liter in Northern Thailand for the pass couple of months. The plane is pure BULL SHYT.

[Pib]

It only benefits those in Bangkok. Diesel has been over 30 baht per liter in Northern Thailand for the pass couple of months. The plane is pure BULL SHYT.

Then I expect those northern Thailand fuel stations are collecting the subsidy while also charging a price as if they were not getting the subsidy...a person could consider that price gouging/fraud. Then again, maybe the govt has set slightly different fuel price controls for different parts of Thailand to cover higher logistics/transportation costs to those areas. Anyway, you are welcomed to swing by Bangkok anytime to fill-up on 29.99 baht/liter diesel.

[gotlost]

It only benefits those in Bangkok. Diesel has been over 30 baht per liter in Northern Thailand for the pass couple of months. The plane is pure BULL SHYT.

Then I expect those northern Thailand fuel stations are collecting the subsidy while also charging a price as if they were not getting the subsidy...a person could consider that price gouging/fraud. Then again, maybe the govt has set slightly different fuel price controls for different parts of Thailand to cover higher logistics/transportation costs to those areas. Anyway, you are welcomed to swing by Bangkok anytime to fill-up on 29.99 baht/liter diesel.

It is the equivalent of 1.5 baht per liter in Saudi Arabia.