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06BANGKOK2617 NEW PRICING POLICY REINTRODUCES DIESEL SUBSIDY

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“62743”,”5/4/2006 4:48″,”06BANGKOK2617″,

“Embassy Bangkok”,”UNCLASSIFIED”,””,

“VZCZCXRO3530

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

 

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

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Written by thaicables

July 11, 2011 at 8:06 am

Posted in Economy, Unclassified

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