Identifier
Created
Classification
Origin
06BANGKOK2617
2006-05-04 04:48:00
UNCLASSIFIED
Embassy Bangkok
Cable title:
THAILAND: NEW PRICING POLICY REINTRODUCES DIESEL
how-toVZCZCXRO3530 PP RUEHCHI RUEHDT RUEHHM RUEHNH DE RUEHBK #2617/01 1240448 ZNR UUUUU ZZH P 040448Z MAY 06 FM AMEMBASSY BANGKOK TO RUEHC/SECSTATE WASHDC PRIORITY 8334 INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 1728 RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS SECTION 01 OF 03 BANGKOK 002617
SIPDIS
SIPDIS
STATE PASS TO USTR
E.O. 12958: N/A
TAGS: ECON ELTN EPET TH
SUBJECT: THAILAND: NEW PRICING POLICY REINTRODUCES DIESEL
SUBSIDY
BANGKOK 00002617 001.2 OF 003
UNCLAS SECTION 01 OF 03 BANGKOK 002617
SIPDIS
SIPDIS
STATE PASS TO USTR
E.O. 12958: N/A
TAGS: ECON ELTN EPET TH
SUBJECT: THAILAND: NEW PRICING POLICY REINTRODUCES DIESEL
SUBSIDY
BANGKOK 00002617 001.2 OF 003
1. (U) SUMMARY: On April 26, after weeks of popular outcry
over high fuel prices, Thailand's Ministry of Energy
announced several fuel pricing measures that had the effect
of reducing the pump price of diesel. Rather than
introducing a direct subsidy, the government reduced
contributions from retail sales to pay off the debt that
remains as a result of the direct subsidy paid in 2004-2005.
Editorial and expert opinion have criticized the effort to
lower fuel prices as price-distorting and self-defeating
because it does not assist in reducing demand for fuel. The
Royal Thai Government feels it has to act, both to
demonstrate its responsiveness to the concerns of ordinary
laborers and the poor, and to undercut criticism of its
policy of privatization of state-owned enterprises. END
SUMMARY
--------------
A NEW DIESEL SUBSIDY IN ALL BUT NAME
--------------
2. (U) On April 26, 2006, the Ministry of Energy (MOE)
decided to cut the contribution to the State Oil Fund (SOF)
from retail disel sales by one baht per liter. The effect
was to reduce the pump price of diesel. PTT Plc has reduced
the retail price of diesel to 25.69 baht/ltr., and other
retail vendors followed, although the other vendors' prices
are higher than the PTT price and on May 4 retailers other
than PTT and Shell implemented an across the board increase
in prices brought the diesel price back up again (to 26.59
baht/ltr.; Shell charges 26.09 baht/ltr.). The MOE also
decided on a two-baht reduction in the price of so-called
purple diesel, a special high-sulfur fuel sold to small
fishing vessels. Additionally, the MOE announced a subsidy
for bus operators of one baht per liter for diesel fuel. The
economic effect of these decisions is to subsidize the price
of diesel fuel. The MOE is considering cutting excise taxes,
among other measures to ease the burden on consumers, if oil
prices continue to rise.
3. (U) The MOE decision follows weeks of popular outcry over
rising fuel prices and the effect they have had on several
sectors of the economy. The Thai press has carried daily
stories of how high fuel costs have crippled fishermen,
farmers, manufacturers, truckers, and transport operators
such as the Bangkok Mass Transit Authority. Although
journalists have not emphasized the point, the essential
problem in all affected sectors is that businesses are unable
to pass on high fuel costs to consumers. Bus fares are
regulated and margins in the transport sector are thin, for
example, thus an increase in fuel costs quickly pushes bus
companies' operations into the red. The fishing industry, by
contrast, simply lacks pricing power because consumers can
choose other products if seafood prices rise. 6 percent
inflation in April is also squeezing margins on the
manufacture of the consumer products subject to price
controls (over 150 items in one form or another).
4. (U) Supply constraints have exacerbated problems
associated with the rise in diesel prices. Oil distilling
facilities at Bangchak Petroleum Plc have been temporarily
closed for repairs, and diesel imported by oil firms carries
a higher price. In April the RTG attempted to remedy
shortages by setting up a quota system for allocation of fuel
to bus operators. The effect, however, was to squeeze supply
further. Transport operators, for example, reportedly had to
pay one baht per liter above regular (regulated) rates for
fuel in order to obtain diesel. Small fishing boat operators
simply kept their trawlers in port, unable to obtain
sufficient fuel on the regular market and unable to afford
black market prices. Estimates vary, but all place at least
1,000 boats in port.
5. (U) The RTG has attempted to shield the public from
surging oil prices for several reasons. Most popular anger
over higher fuel prices is likely to be directed at the
incumbent government if it does nothing, according to
Prudhisan Jumbala, a political scientist at Chulalongkorn
University. The Thaksin government in particular has based
much of its electoral appeal on the strength of its
commitment to addressing the concerns of ordinary laborers
and the poor. The RTG's policy of privatizing state-owned
enterprises -- among them petroleum giant PTT -- has also
come under fire recently, and both the RTG and PTT have
attempted to use fuel price manipulation to uncercut this
criticism. As PTT Presdient Prasert Bunsumpun commented to
the press on May 2, "Since our company is mainly owned by the
BANGKOK 00002617 002.2 OF 003
government and a lot of Thai people, there is no reason the
firm will run business in a way that exploits consumers."
-------------- ---
WHILE THE DEBT FROM THE PREVIOUS SUBSIDY REMAINS
-------------- ---
6. (U) Under the new arrangement, the SOF receives only 90
satang for every liter of diesel sold on the retail market,
down from 1.90 baht previously (one baht consists of 100
satang). Energy Minister Viset Choopiban acknowledged that
the reduction in money collected for the oil fund will total
about 1.5 billion baht per month. The MOE is expected to
receive 2.5 billion baht from retail fuel sales, down from 4
billion baht.
7. (U) The SOF was originally set up to reduce pump price
volatility and to give rural communities a cheap energy
source. In 2004-2005, the fund spent over 80 billion baht to
keep fuel prices artificially low through a diesel subsidy.
The government of Prime Minister Thaksin Shinawatra decided
to abandon this costly policy after its reelection in
February 2005. The government is still paying off 26.4
billion baht in bonds to fund the debt accumulated from the
previous subsidy scheme. As a result of the decision to cut
the contribution to the SOF, the Energy Policy and Planning
Office (EPPO) had to reschedule loan payments with creditors.
-------------- --------------
CRITICS: STOP-GAPS HURT EFFORTS TO REDUCE CONSUMPTION
-------------- --------------
8. (U) The government's announcement of the new subsidies
had the intended effect of dissipating consumer discontent.
Complaints have fallen off. Inter-provincial bus operators
who had been planning to raise fares or go on strike if the
RTG did not cap diesel prices called off their strike plan
after the MOE announced the subsidy. Newspapers have carried
stories on PTT's plan to spin off a subsidiary oil refinery
rather than on calls to probe oil company profits.
9. (U) Editorial and expert opinion, however, has been
critical. Post Today editorialized that "The price
intervention is a price distortion. By keeping the diesel
price low, the government is hurting its own efforts to
encourage people to reduce oil consumption. Users of diesel
oil will not be compelled to economise when the price is
low." Tharn Settakij expressed its sympathy for those with
low income, but noted that the problem of high fuel prices
will not go away if Thailand continues to consume fuel at the
present rate.
10. (U) Almost all observers agree that the subsidy is only
a short-term fix, and that the RTG is betting on world fuel
prices going down. At a Stock Exchange of Thailand
roundtable discussion on the day the subsidy was announced,
however, company executives voiced concern of $100/barrel
oil. The effect of high oil prices is exacerbated by
Thailand's extremely low energy efficiency and lack of
domestic oil supply.
--------------
COMMENT
--------------
11. The new subsidies distort the Thai fuel market and raise
concerns about both the ability of Thailand's economy to
adapt to change and the attractiveness of the investment
climate. By their very nature, the RTG-imposed controls on
certain consumer products and materials such as steel and
cement impede the ability of the economy to adapt to changing
fuel prices because they lead to shortages and bottlenecks in
an inflationary environment. No one knows the level at which
the price of a given item would peak if controls were lifted,
so it is hard for businesses to make informed investment
decisions. Owing to the political sensitivity of the diesel
price, it is hard for the government not to intervene,
especially since direct diesel subsidies ended only last
July. Yet such resort to using PTT diesel pricing policy as
a way of setting retail prices sets a disturbing precedent.
It shows the limits of the actual privatization of Thailand's
state owned enterprises. Additionally, minority shareholders
in the partially privatized PTT are clearly being deprived of
potential profit. Such manipulation of the market by the
majority shareholder sends the wrong signal to potential
BANGKOK 00002617 003.2 OF 003
investors.
BOYCE
SIPDIS
SIPDIS
STATE PASS TO USTR
E.O. 12958: N/A
TAGS: ECON ELTN EPET TH
SUBJECT: THAILAND: NEW PRICING POLICY REINTRODUCES DIESEL
SUBSIDY
BANGKOK 00002617 001.2 OF 003
1. (U) SUMMARY: On April 26, after weeks of popular outcry
over high fuel prices, Thailand's Ministry of Energy
announced several fuel pricing measures that had the effect
of reducing the pump price of diesel. Rather than
introducing a direct subsidy, the government reduced
contributions from retail sales to pay off the debt that
remains as a result of the direct subsidy paid in 2004-2005.
Editorial and expert opinion have criticized the effort to
lower fuel prices as price-distorting and self-defeating
because it does not assist in reducing demand for fuel. The
Royal Thai Government feels it has to act, both to
demonstrate its responsiveness to the concerns of ordinary
laborers and the poor, and to undercut criticism of its
policy of privatization of state-owned enterprises. END
SUMMARY
--------------
A NEW DIESEL SUBSIDY IN ALL BUT NAME
--------------
2. (U) On April 26, 2006, the Ministry of Energy (MOE)
decided to cut the contribution to the State Oil Fund (SOF)
from retail disel sales by one baht per liter. The effect
was to reduce the pump price of diesel. PTT Plc has reduced
the retail price of diesel to 25.69 baht/ltr., and other
retail vendors followed, although the other vendors' prices
are higher than the PTT price and on May 4 retailers other
than PTT and Shell implemented an across the board increase
in prices brought the diesel price back up again (to 26.59
baht/ltr.; Shell charges 26.09 baht/ltr.). The MOE also
decided on a two-baht reduction in the price of so-called
purple diesel, a special high-sulfur fuel sold to small
fishing vessels. Additionally, the MOE announced a subsidy
for bus operators of one baht per liter for diesel fuel. The
economic effect of these decisions is to subsidize the price
of diesel fuel. The MOE is considering cutting excise taxes,
among other measures to ease the burden on consumers, if oil
prices continue to rise.
3. (U) The MOE decision follows weeks of popular outcry over
rising fuel prices and the effect they have had on several
sectors of the economy. The Thai press has carried daily
stories of how high fuel costs have crippled fishermen,
farmers, manufacturers, truckers, and transport operators
such as the Bangkok Mass Transit Authority. Although
journalists have not emphasized the point, the essential
problem in all affected sectors is that businesses are unable
to pass on high fuel costs to consumers. Bus fares are
regulated and margins in the transport sector are thin, for
example, thus an increase in fuel costs quickly pushes bus
companies' operations into the red. The fishing industry, by
contrast, simply lacks pricing power because consumers can
choose other products if seafood prices rise. 6 percent
inflation in April is also squeezing margins on the
manufacture of the consumer products subject to price
controls (over 150 items in one form or another).
4. (U) Supply constraints have exacerbated problems
associated with the rise in diesel prices. Oil distilling
facilities at Bangchak Petroleum Plc have been temporarily
closed for repairs, and diesel imported by oil firms carries
a higher price. In April the RTG attempted to remedy
shortages by setting up a quota system for allocation of fuel
to bus operators. The effect, however, was to squeeze supply
further. Transport operators, for example, reportedly had to
pay one baht per liter above regular (regulated) rates for
fuel in order to obtain diesel. Small fishing boat operators
simply kept their trawlers in port, unable to obtain
sufficient fuel on the regular market and unable to afford
black market prices. Estimates vary, but all place at least
1,000 boats in port.
5. (U) The RTG has attempted to shield the public from
surging oil prices for several reasons. Most popular anger
over higher fuel prices is likely to be directed at the
incumbent government if it does nothing, according to
Prudhisan Jumbala, a political scientist at Chulalongkorn
University. The Thaksin government in particular has based
much of its electoral appeal on the strength of its
commitment to addressing the concerns of ordinary laborers
and the poor. The RTG's policy of privatizing state-owned
enterprises -- among them petroleum giant PTT -- has also
come under fire recently, and both the RTG and PTT have
attempted to use fuel price manipulation to uncercut this
criticism. As PTT Presdient Prasert Bunsumpun commented to
the press on May 2, "Since our company is mainly owned by the
BANGKOK 00002617 002.2 OF 003
government and a lot of Thai people, there is no reason the
firm will run business in a way that exploits consumers."
-------------- ---
WHILE THE DEBT FROM THE PREVIOUS SUBSIDY REMAINS
-------------- ---
6. (U) Under the new arrangement, the SOF receives only 90
satang for every liter of diesel sold on the retail market,
down from 1.90 baht previously (one baht consists of 100
satang). Energy Minister Viset Choopiban acknowledged that
the reduction in money collected for the oil fund will total
about 1.5 billion baht per month. The MOE is expected to
receive 2.5 billion baht from retail fuel sales, down from 4
billion baht.
7. (U) The SOF was originally set up to reduce pump price
volatility and to give rural communities a cheap energy
source. In 2004-2005, the fund spent over 80 billion baht to
keep fuel prices artificially low through a diesel subsidy.
The government of Prime Minister Thaksin Shinawatra decided
to abandon this costly policy after its reelection in
February 2005. The government is still paying off 26.4
billion baht in bonds to fund the debt accumulated from the
previous subsidy scheme. As a result of the decision to cut
the contribution to the SOF, the Energy Policy and Planning
Office (EPPO) had to reschedule loan payments with creditors.
-------------- --------------
CRITICS: STOP-GAPS HURT EFFORTS TO REDUCE CONSUMPTION
-------------- --------------
8. (U) The government's announcement of the new subsidies
had the intended effect of dissipating consumer discontent.
Complaints have fallen off. Inter-provincial bus operators
who had been planning to raise fares or go on strike if the
RTG did not cap diesel prices called off their strike plan
after the MOE announced the subsidy. Newspapers have carried
stories on PTT's plan to spin off a subsidiary oil refinery
rather than on calls to probe oil company profits.
9. (U) Editorial and expert opinion, however, has been
critical. Post Today editorialized that "The price
intervention is a price distortion. By keeping the diesel
price low, the government is hurting its own efforts to
encourage people to reduce oil consumption. Users of diesel
oil will not be compelled to economise when the price is
low." Tharn Settakij expressed its sympathy for those with
low income, but noted that the problem of high fuel prices
will not go away if Thailand continues to consume fuel at the
present rate.
10. (U) Almost all observers agree that the subsidy is only
a short-term fix, and that the RTG is betting on world fuel
prices going down. At a Stock Exchange of Thailand
roundtable discussion on the day the subsidy was announced,
however, company executives voiced concern of $100/barrel
oil. The effect of high oil prices is exacerbated by
Thailand's extremely low energy efficiency and lack of
domestic oil supply.
--------------
COMMENT
--------------
11. The new subsidies distort the Thai fuel market and raise
concerns about both the ability of Thailand's economy to
adapt to change and the attractiveness of the investment
climate. By their very nature, the RTG-imposed controls on
certain consumer products and materials such as steel and
cement impede the ability of the economy to adapt to changing
fuel prices because they lead to shortages and bottlenecks in
an inflationary environment. No one knows the level at which
the price of a given item would peak if controls were lifted,
so it is hard for businesses to make informed investment
decisions. Owing to the political sensitivity of the diesel
price, it is hard for the government not to intervene,
especially since direct diesel subsidies ended only last
July. Yet such resort to using PTT diesel pricing policy as
a way of setting retail prices sets a disturbing precedent.
It shows the limits of the actual privatization of Thailand's
state owned enterprises. Additionally, minority shareholders
in the partially privatized PTT are clearly being deprived of
potential profit. Such manipulation of the market by the
majority shareholder sends the wrong signal to potential
BANGKOK 00002617 003.2 OF 003
investors.
BOYCE