Waiting for the windfall

Waiting for the windfall

How the plunging crude prices affect consumers, motorists and manufacturers in Thailand.

Mrs Somjai does not see a dip in her daily expenses and household bills, nor do her pockets feel heavier.

The only benefit the 40-year-old mother of two feels, given the continuing plunge in oil prices the past many months, is a few 100-baht bank notes saved in petrol money. 

"I save a few hundred each time I fill my car and that's about it," Mrs Somjai says.

Like many other consumers, Mrs Somjai is suspicious about how a 50% nosedive in global oil prices has not really translated into lower household bills and living costs.

Pump prices have dropped but not in line with global crude as domestic fuel prices have been distorted by government subsidies and the state Oil Fund. Bloomberg

"With oil prices falling, I'm curious as to why utility charges and the prices of consumer products and street food are still high. For example, a dish of phat krapao gai kai dao (basil fried chicken with fried egg) still costs the same. How are consumers benefiting?" she laments.

Even if the consumer confidence index is rising, Mrs Somjai still feels reluctant to spend, uncertain about country's recovery.  

It is a conventional practice that the price of living costs — food, utilities, consumer goods — shoots up like a rocket whenever oil prices gain. But when oil prices drop, such prices always remain stubbornly inelastic.

There has been a hot debate over the past month on whether consumers have benefited from cheaper oil or businesses are the only ones enjoying the windfall.  

What's with global oil prices?

Crude oil prices started their plummet in the middle of last year, finally dipping below US$50 a barrel this month for the first time since February 2009 after staying at about $100 a barrel since 2010.

As of Jan 15, prices of Dubai crude stood at $41.95 and West Texas Intermediate at $45.87 a barrel. 

The key reasons for the price plunge are continued weak demand as the global economy remains tepid and a huge excess supply from an increase in production, particularly shale oil and shale gas in North America.  

There is no sign of a reduction in oil production as the Organization of the Petroleum Exporting Countries (Opec) and non-Opec countries continue to jostle for market share. 

"This is about geopolitics and it's sensitive," says Charl Kengchon, managing director at Kasikorn Research Center. 

The Energy Information Administration ranks the top three oil-producing countries as Saudi Arabia, the US and Russia. 

Mr Charl says falling oil prices are definitely hurting oil-producing countries, but yielding benefits for oil importers and major oil consumption countries like the US, China, Japan and Europe. He predicts lower oil prices will improve global GDP growth this year, as well as Thai growth in the second half. 

Boontuck Wungcharoen, president of the Thai Bankers' Association, says plummeting oil prices will add an estimated 0.5 percentage points to Thai economic growth this year. However, the state is expected to lose around 40 billion baht in tax revenue on imported oil. 

The price slump will also discourage new oil exploration.

How are motorists benefiting?

Since last May to Jan 14, the price of petrol dropped by 14.79 baht a litre, or 30.09% to 34.36 from 49.15 baht. Gasohol 95 fell by 13.83 baht a litre or 33.62% to 27.30 from 41.13 baht a litre, while gasohol 91 dipped by 12.7 baht or 32.83% to 25.98 baht a litre. Gasohol E20 fell by 11.60 baht, or 32.06%, to 24.58 from 36.18 baht a litre.

For motorists wondering why it is not a 50% decrease when crude oil prices dropped 50%, domestic fuel prices do not hold a direct correlation with global oil prices as they have been distorted by long-term government subsidies and the state Oil Fund. 

"Long-term subsidies have created price distortion and that makes it hard for retail prices to reflect market prices," says Nipon Puapongsakorn, a distinguished economist at the Thailand Development Research Institute. 

Thai drivers have been paying for the government's cross-subsidy for liquefied petroleum gas (LPG) or cooking gas every time they fill up their cars, going on over a decade. During the past seven to eight years, the annual subsidy cost was 4-5 billion baht, though last year it rose to 20 billion. 

Before crude prices collapsed, petrol users had been paying 10-19 baht per litre to the Oil Fund, more than 20% the ex-refinery price. 

Manoon Siriwan, an energy analyst and member of the National Reform Council, says once the global oil price reached $100 a barrel, the number of motorists shifting from petrol and diesel to price-capped LPG greatly surged.

Because of cross-subsidies and a price cap, the price of LPG was only half that of petrol and diesel during that period. At the end of 2014, the number of vehicles using LPG jumped to 1.2 million from 66,000 in 2010. 

"From 2008 to 2014, motorists paid 200 billion baht into the Oil Fund," says Mr Manoon, adding cheap LPG led to smuggling into neighbouring countries.  

Since 2005 the price of LPG has been capped at $333 per tonne, or 18.13 baht a kg, all as the global LPG price has sat above $700 per tonne. Governments never changed the subsidy for fear of losing popularity. 

Then in 2011 the government decided to cap the diesel price at 30 baht a litre by cancelling all taxes, amounting to 5.31 baht a litre at that time. This cost the government revenue of 370 billion baht from 2011 to 2014. 

The move caused diesel consumption to shoot above 60 million litres at the end of 2012 from 55 million before. Other price distortions include capping the price of compressed natural gas (CNG) at 10.50 baht a kg, causing sole seller PTT Plc losses of 95.3 billion baht from 2004 to 2014. 

Time to reform

Energy price reform was on the military's urgent agenda following the coup, and several energy prices have been changed to be less distorted. 

Cross-subsidies for LPG were lifted in October 2013, with the price increasing by 50 satang per month. The difference between the LPG price and gasohol 91 stands at around 2.50 baht, compared with about 17 baht last May. 

The government terminated the cap on diesel prices and imposed a tax of 3.57 baht a litre and a levy of 3.35 baht. The price difference between gasohol 91 and diesel is only 50 satang, compared with 10 baht last May.  

It also plans to end CNG's price cap, gradually increasing the price.

"We're about halfway through energy price reform," says Energy Minister Narongchai Akrasanee, adding the government plans to complete full price restructuring this year.

"Without knowing it, white collar workers buying petrol have had to subsidise LPG, diesel and CNG through taxes and contributions to the Oil Fund," says Mr Narongchai.

The government plans to float the LPG price, gradually increase the CNG price and impose taxes on diesel. 

Are consumers benefiting?

LPG prices for cooking and automobiles have risen by 6.8% and 13%, respectively. 

The Internal Trade Department says most business operators and producers claim they are unable to reduce their product and service prices because they are tied to long-term contracts and inventory set at previous prices. 

A department official who wished to remain anonymous says for food and consumer products, 70-80% of total costs are for raw materials, with the rest normally spent on marketing, distribution and logistics.  

"Many of them blame logistics and transportation costs that remain unchanged, leaving their costs the same, so they refuse to reduce prices," says the official.

Somchai Pornrattanacharoen, president of the Thai Retailers and Wholesalers Association, says for most producers logistics costs make up only 5-10% of total costs. Diesel is widely used for logistics and transportation in this sector, and diesel prices have fallen by only four baht recently. 

Mr Nipon says for most businesses, rent and wages make up the majority of costs while logistics is minimal. The prices of goods and services also surged after the daily minimum wage rise to 300 baht across the nation. 

"Advertising cost is a significant part of overall costs for most consumer products, not logistics," he says.

Boonyarit Mahamontri, president of Lion Corporation (Thailand), the consumer goods maker under the Saha Group, says the company does not plan to reduce product prices because it has only benefited slightly from falling oil prices. Logistics makes up 5-7% of its total costs. 

Paisarn Aowstaporn, Oishi's executive vice-president for food business, says the company outsources its logistics operation to another company on a long-term contract.

"But we'll monitor oil prices closely. If they continue go down, we may re-negotiate the service fees with the logistics company and pass the benefit to customers through a promotional campaign," says Mr Paisarn.

Vichien Kantathavorn, managing director of logistics service provider Tiger Distribution and Logistics Co, decided to pass on the savings to customers by lowering its service fees 20%. 

"We were the last to increase our service fees and the first to reduce them," he says. 

New equilibrium

Energy analysts and economists predict crude prices to bounce back slowly in the second half of the year as some producers shut down because the price does not justify the costs. 

"Eventually, through real demand and supply, crude prices will find a new equilibrium and that could be $70-80 a barrel," says Mr Charl. 

Long-term consumers should continue to benefit from the oil price drop, he says.

"One key strategy is to increase the choices and supply in the market so product and service prices will become more competitive," says Mr Charl. 

Mr Nipon shares the opinion, saying promoting fair competition and preventing monopolies is vital to encourage price competition.  

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