Oil Fuel Fund risks Bt100bn deficit as Red Sea crisis deepens

Thailand’s Oil Fuel Fund could slide back into a deficit of Bt100 billion if the government continues subsidising fuel prices across the board, energy economist Praipol Koomsup warned on Thursday, as Houthi attacks threatened the Red Sea route Saudi Arabia uses to bypass the Strait of Hormuz.

The warning came as most standard petrol, gasohol and diesel prices in Thailand rose by 90 satang a litre from 5am on July 23, while the fund was carrying fuel-subsidy costs of about Bt651.31 million a day. Its official net position stood at minus Bt61.5 billion as of July 19.

Professor Praipol, a former dean of Thammasat University’s Faculty of Economics and an independent energy analyst, told Krungthep Turakij that the latest Middle East tensions had clearly deteriorated.

He said renewed US strikes against Iran and Houthi attacks on Saudi oil tankers had helped push global crude prices above US$95 per barrel.

Brent crude futures rose 2% to US$96 a barrel in early trading on Thursday, their highest level since June 8. West Texas Intermediate gained 1.7% to US$88.27 per barrel.

Red Sea attacks expose Saudi oil bypass

The Iran-aligned Houthis said they had targeted two Saudi tankers, the Encelia and the Layla, as part of a naval blockade declared against Saudi Arabia.

Saudi authorities confirmed that an attack had caused a fire on the bow of the Encelia, although all crew members were safe. The reported attack on the Layla had not been independently confirmed.

The attacks are particularly significant because they threaten the alternative route Saudi Arabia uses to reduce its dependence on the Strait of Hormuz.

Saudi Aramco’s East-West pipeline can transport about five million barrels of crude a day from the Abqaiq processing centre near the Gulf to the Red Sea port of Yanbu. This allows Saudi oil to bypass Hormuz, but Asia-bound tankers leaving Yanbu normally sail south through the Bab el-Mandeb Strait.

The Houthi threat has therefore opened a potential second chokepoint for regional oil exports at a time when shipping through Hormuz is already under severe pressure.

Ship-tracking data showed that several tankers had changed course after the Houthis warned vessels against sailing to Saudi ports. Some tankers that had loaded at Yanbu turned north towards the Suez Canal rather than risk sailing through Bab el-Mandeb.

For cargoes destined for Asia, such diversions could add about 10,000 nautical miles and 34 days to a voyage. Additional freight costs could exceed US$5 million per shipment, excluding extra fuel and insurance expenses, while a Suez Canal crossing would add about US$1 million per vessel.

“If the Houthis intensify their attacks, particularly if they spread to infrastructure, production facilities or oil pipelines in Saudi Arabia, it will become a major problem,” Praipol said.

He said crude prices could reach US$100 per barrel if the attacks expanded or caused more serious disruption to regional oil supplies.

A broader cycle of retaliation between the United States and Iran could also threaten electricity, natural-gas and other energy infrastructure across the region, affecting production as well as transport, he added.

Thailand’s subsidy bill surges

Thailand cannot avoid the effects of higher global oil prices because the country remains heavily dependent on imported energy, Praipol said.

The pressure is already visible in regional refined-product markets. Singapore benchmark diesel climbed to US$163.59 per barrel on July 22, while petrol rose to US$124.92 per barrel.

The rise in benchmark prices prompted the Oil Fuel Fund Executive Committee to adjust its levies and subsidies while allowing most standard pump prices to increase by 90 satang a litre.

The fund increased its subsidy for standard high-speed diesel by Bt0.78 to Bt8.57 per litre, bringing the retail price to Bt36.69 per litre after the increase.

Support for B20 diesel rose by Bt0.56 to Bt12.95 per litre, with the retail price reaching Bt31.69. Premium diesel remained subject to a fund levy of Bt1.50 per litre.

Standard petrol rose to Bt45.68 per litre. Gasohol 95 increased to Bt36.69, gasohol 91 to Bt36.32, E20 to Bt31.69 and E85 to Bt27.63. Premium fuel grades were excluded from the 90-satang increase announced by major retailers.

“We probably cannot avoid expensive oil and will have to use the Oil Fuel Fund mechanism to absorb some of the burden,” Praipol said.

“The question is how to ease the impact.”

The fund had assets of Bt39.84 billion and liabilities of Bt101.34 billion as of July 19, leaving it with a net deficit of Bt61.5 billion. Its fuel-related account was Bt22.14 billion in deficit, while its liquefied petroleum gas account was Bt39.36 billion in deficit.

Praipol warned that continuing to use the fund to subsidise every consumer, regardless of income or need, could push its deficit back towards Bt100 billion.

Targeted relief urged over blanket subsidies

Praipol urged the government to replace blanket price support with targeted assistance for vulnerable households and businesses.

Such an approach would allow the authorities to protect groups most exposed to higher transport and living costs while reducing the burden on the fund and the wider public finances, he said.

Existing short-term measures might still have to be used to manage the immediate shock, but the fund’s Bt200-billion borrowing facility should be handled carefully and effectively, including in support of Thailand’s longer-term energy transition.

Praipol also called for stronger energy-conservation measures, saying households and businesses needed to use fuel and electricity more efficiently while international prices remained elevated.

Domestic energy development needed

Over the longer term, Thailand should accelerate domestic petroleum exploration and production to reduce its exposure to global supply shocks, Praipol said.

He highlighted potential resources in the Andaman Sea and urged the government to proceed with petroleum-concession bidding, although he acknowledged that exploration and commercial production would take years.

Praipol also praised Thai oil companies for diversifying their crude-supply sources. The strategy had lowered the risk of a physical oil shortage, even though Thailand could not prevent domestic prices from rising in line with international markets.

The immediate policy challenge, he said, was to protect vulnerable consumers without allowing a prolonged international oil shock to create another unsustainable burden for the Oil Fuel Fund.

Ministry points to prolonged price pressure

A source at the Energy Ministry told Krungthep Turakij that the Middle East conflict had become more intense and prolonged following the failure of negotiations.

The source said attacks had spread to countries around the Arabian Gulf, while Iran had reaffirmed its intention to close the Strait of Hormuz. In the Red Sea, Houthi threats and attacks against tankers and cargo vessels using Saudi ports had forced ships to change course, immediately raising freight and insurance costs.

At the time of the ministry’s assessment, Brent crude had risen as much as 1.4% to trade above US$95 per barrel, while West Texas Intermediate was near US$88. Singapore benchmark diesel had surged to US$163.59 per barrel on July 22, with petrol reaching US$124.92.

The price surge had placed further pressure on the Oil Fuel Fund’s liquidity, leaving it with subsidy costs of about Bt651.31 million a day.

On July 23, the fund raised its subsidy for standard diesel by Bt0.78 to Bt8.57 per litre, setting the retail price at Bt36.69. The subsidy for B20 diesel rose by Bt0.56 to Bt12.95 per litre, with the pump price set at Bt31.69. Premium diesel remained subject to a Bt1.50-per-litre levy.

For petrol products, the fund reduced its levy on standard petrol by Bt0.41 to Bt4.19 per litre, resulting in a retail price of Bt45.68.

Subsidies for gasohol 95 and gasohol 91 each increased by Bt0.30 to Bt2.89 per litre, setting their retail prices at Bt36.69 and Bt36.32 respectively.

The subsidy for E20 rose by Bt0.17 to Bt6.47 per litre, resulting in a pump price of Bt31.69. For E85, the subsidy was reduced by Bt0.53 to Bt4.37 per litre, setting the retail price at Bt27.63

Source: Bangkokbiznews