The government’s expressed determination to prevent a hike in energy prices during the last two months of 2023 was met with cheers from the public and dismay from the Energy Regulatory Commission, the Electricity Generating Authority of Thailand (Egat), and related agencies.
Obviously, keeping energy prices stable is good politics. But is it also bad economics?
My answer is a resounding “yes”.
Let me explain why.
Of all the prices of goods and services, the costs of energy and food are the most volatile and politically sensitive. This is why they are not included in the measurement of core inflation, but classified as headline inflation, which is a measure of the total inflation. Because energy prices are so volatile, most countries have a mechanism to stabilise prices.
In Thailand’s case, that mechanism is split into two: one for the price of oil and gas, and the other, for the price of electrical power. This mechanism has been in existence for a long time and came about as a result of the second oil crisis in 1979.
In that year, the Organisation of the Petroleum Exporting Countries (Opec) increased the price of crude oil by almost 100% over the previous year and the-then government of PM General Kriangsak Chamanan was forced to raise the prices of benzine and diesel in 1980.
The public outcry was so loud that Gen Kriangsak had to resign. He was replaced that same year by General Prem Tinsulanonda. Several years later, in 2004, the Oil Fund was set up to stabilise prices, not to control them.
When prices are down, the Fund collects money from the sale of oil and gas products. For example, when prices were low in 2014/15, as the Minister of Energy at the time, I collected money for the Oil Fund. The Fund went from a deficit of about 20 billion baht in mid-2014 to a surplus of about 40 billion by the end of 2015.
Since the war between Russia and Ukraine erupted in February 2022, resulting in much higher prices of oil and gas, the policies of the Prayut administration and now the Srettha government have been to keep retail prices of oil and gas low, lower than the reference international prices.
The result is the Oil Fund has fallen deep into a negative zone with a deficit of about 80 billion baht and rising. This is already considered to be the “red zone” and has negative ramifications for the oil and gas businesses, as well as the potential to become public debt, affecting every Thai citizen regardless of their use of oil and gas.
Likewise, electricity prices have a stabilising mechanism in the form of a fuel tariff or Ft. As Thailand’s electricity production is 70% dependent on fossil fuels, particularly natural gas, the production cost varies according to the price of natural gas.
The Ft factor is calculated by an autonomous body called the Power Regulatory Commission. It is applied for four months to assure stability but needs to be adjusted up or down depending on the price of natural gas
Recently, rises in Ft have not been passed on to Egat, which has shouldered huge losses of more than 70 billion baht. Egat therefore has had to delay payments to its suppliers. And if this deficit goes up to 100 billion baht, Egat will be in major financial trouble.
In such an eventuality, that deficit will turn to public debt, with every Thai citizen being liable. So, in sum, what the government is doing about energy prices is simply to push the problems into the future. And when the deficits become public debt, the costs are passed on to society. This is considered bad economics.
And so politicians are confronted with a dilemma between good politics and bad economics. Naturally, politicians choose good politics, regardless of negative economic implications.
We, the people, should make our own judgements about such a policy, and rather than cheer this practice, we should encourage structural reform for better efficiency and productivity of the energy sector, which would reduce costs.
In the meantime, we should economise on our energy consumption and usage as much as possible, as energy prices are likely to stay on the upside going forward.
Senior Development Economist and Fomer Minister of Commerce and Energy