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ANALYSIS

Short-term political gain on diesel prices will be paid for by next govt

By Watcharapong Thongrung

The Nation

Having resorted to maintaining retail diesel prices via the oil excise tax, the government can now be reasonably confident the cost of living will remain at roughly the current level until after the election.

However, despite the short-term political gain, it should beware of the measure backfiring later when the public learns that consumers will eventually have to shoulder the deferred cost.

The government's decision to temporarily waive the oil excise tax of Bt5.30 per litre, as well as value-added tax of 40 satang per litre, has come at a time when the Oil Fund is running into a deficit, following the four-month subsidy.

To date, the Oil Fund has racked up aggregate subsidies of more than Bt20 billion and, with some Bt4.5 billion left in its coffers, the fund is barely large enough to continue the task until the end of this month.

The combined excise duty and VAT of Bt5.70 per litre is certainly not sufficient to compensate for the current Oil Fund subsidy of Bt6.40 per litre. But it should buy time for the government, which can't risk seeing retail diesel prices exceed the psychological level of Bt30 as it fears of a spike in consumer goods and production costs, and hence inflation.

Thienchai Chongpeepien, an adviser to the energy minister's Energy Policy and Planning Office said: "It's clear that this decision is politically motivated. However, it won't help much. Consumers will have to shoulder the burden anyway, though not [in the lifetime of] this government.

"When the next government is formed and if global oil prices recede, they will need to pay

more to compensate for the loss. And along with this, petrol consumers will shoulder the highest burden."

Thienchai said he was against the measure, with his memory fresh of events in 2008 when the global price of crude oil hit a record US$147 per barrel and the Samak Sundaravej government resorted to the same measure.

The excise duty on low-sulphur diesel was cut from Bt3.305 per litre to Bt2.305, only to be raised to the earlier level later.

Moreover, the current Abhisit Vejjajiva government had to increase the tax to Bt5.30 to recoup these past losses, even though oil prices at the time were retreating quickly.

The academic said that though current oil prices were highly motivated by speculation, it may be difficult to experience such a sharp price retreat this time around.

He said that as the public would have to shoulder the cost anyway, it was better that they do it now and cut their consumption to save on costs.

"Market distortion would only lead to unreasonable consumption. Keeping prices too low will only spark unreasonable consumption, like in the case of natural gas and liquefied petroleum gas, consumption of which expanded 30 per cent and 10 per cent, respectively, last year," he said.

The decision will certainly benefit the government. Transport operators as well as several manufacturers are poised to ask for price increases once diesel exceeds Bt30 per litre. Such increases at this stage would not produce a positive result, as the opposition Pheu Thai Party is attacking the government over the spiking cost of living, ahead of the election.

According to a source in the energy industry, a flaw lies in the fact that nobody knew that oil prices would spike quickly from $80-$90 per barrel late last year to nearly $120. That encouraged the government to set the target ceiling at Bt30 last December, and this forced it to continue with the subsidy.

"Had it known the price outlook, at the beginning of this year it could have set the ceiling slightly higher than Bt30, and then allowed transport and production costs of some items to rise. Then, there were months in which it could have explained to the public, in an effort to win back political support. But it's too late for a change now. Changing course would only lead to a political loss, which is far more important than an economic loss," the source said.

-- The Nation 2011-04-19

[gregb]

Personally I find this blatant vote buying attempt by the current government to be criminal. I do understand why they think they need to do it, but that doesn't make it right. There are bigger things at stake here. People need to learn to adjust to high energy prices. The stabilization that they need in the economy must come from increasing taxes when oil falls, not decreasing taxes when it becomes expensive. And at the risk of this becoming another political thread, I will just say the opposition to the current government is even worse.

We need more reliance on rail travel and mass transit, and fewer energy intensive long distance trucks. Every night I watch hundreds if not thousands of pickup trucks loaded with vegetables arriving from the north to the See Mon Muang wholesale market for distribution all over Bangkok. There is a railroad that runs directly next to this place. Let's see some creativity by the powers that be. Let's bring this stuff in by train instead. Let's speed up the implementation of all those mass transit projects and pay for it with taxes on fuel. People will adjust to higher energy prices, but we need competent policies by those in power.

Energy is only going to get more and more dear as time goes on. It is time to start the adjustment process. Anything else is a disservice to the people of this great kingdom, and I lay the blame square at the feet of those who are currently raping the coffers of this nation and hurting the long term viability of the economy solely for their own benefit.

[cloudhopper]

Personally I find this blatant vote buying attempt by the current government to be criminal.

I don't know where you're from greg but the same thing has been going on in my USA for many decades. I once knew someone there who decided he could "not grow" a subsidized crop as well as any farmer and made lots of money abusing this program. What about ethanol? Criminal is what the courts say....but as many will soon realize in dismay the laws of physics are not subject to interpretation by incompetent and corrupt politicians.