The hidden costs of oil benefits

The lower prices are bringing benefits to net oil-importers like Thailand, whose energy import bills have exceeded Bt1.4 trillion annually in recent years. With Dubai crude falling below $50 per barrel last week, hopes are high that savings on energy bills can be channelled into productive projects to enhance the country’s competitiveness.

But will these price levels last?

The price of Dubai crude – the oil-price reference used by Asian countries – has plunged nearly 50 per cent from last year’s peak of $108.01 per barrel, in June. Brent and West Texas Instrument (WTI) crude – two key global price benchmarks – are also at their lowest since April 2009.

Most economists believe that the price average will stay below $100 this year. Yesterday, Goldman Sachs lowered its three-month price forecast for Brent to $42 a barrel from $80. They projected US crude at $41 a barrel, down from $70.

The US Energy Information Administration expects WTI crude oil prices to average $63 per barrel in 2015.

Forbes’ contributor Michael Lynch says that in the longer term, the primary determinant of oil prices will be the cost of producing shale oil, which seems likely to be below $50 a barrel. 

His forecast supports a conspiracy theory that the US is ready to keep the price low to boost the economy, banking on huge domestic supplies of shale oil. This means that the Organisation of Petroleum Exporting Countries (Opec), the biggest oil-producing group, would suffer if its crude were priced higher. It somewhat explains why Saudi Arabia – the group’s largest member – says it is financially strong enough to withstand the drop in world oil prices. 

Yet, how long can this continue?

Venezuela, an Opec member, has said it is willing to cut production to support prices. Iran, another member, has criticised Saudi Arabia for not backing steps to bolster prices.

Meanwhile, Russia, not an Opec member, is suffering badly from the price crash, as oil exports account for over 25 per cent of its gross domestic product. 

Yet, too much optimism over the plunge is a dangerous trap for beneficiaries like Thailand. Everybody loves to pay less for energy, but it would be a disaster if Thai authorities were hasty and backtracked on certain energy policies.

The Energy Ministry should be commended for its decision to end the price subsidy on cooking gas next month. The low cost of oil will keep gas prices down, which should prevent protests, which some have forecast.

It remains to be seen, though, how it the ministry will handle other issues at hand.

One is the biofuel policy. Farmers have been encouraged to grow fuel crops – sugar, tapioca and oil palm for the production of ethanol and biodiesel. The prices of ethanol and biodiesel are fixed on a monthly basis. Ethanol was set at Bt27 a litre in December, but motorists filled their tanks for only Bt22.48 per litre. The retail price indicated a kind of subsidy, further explaining why big players like Shell, Esso and Chevron (Caltex) don’t sell this kind of fuel. How long can ethanol subsidies be maintained?

History shows that subsidies only distort the market mechanism and that nobody benefits from them in the end. 

Take the LPG subsidy as an example. For years, the price was fixed at $333 per tonne, discouraging refineries from produce the cooking gas. Cooking gas is also used widely by trucks and taxis, at a cost to other motorists, who pay for the subsidy. Without the subsidy, all would have more money to spend. In time, this would benefit the entire economy, not just gas users.

With the subsidy about to be terminated, PTT has announced plans to “de-bottleneck” gas separation plants to boost capacity. Likewise, if petrol products with high ethanol content were retailed at market prices, they would be available at more fuel stations to the benefit of motorists.

Junta-appointed lawmakers are also talking about offering households free installation of solar-energy roof panels to increase solar power usage. Some have voiced the opinion that solar power would be a success if the authorities switch back to the old purchase-price formula. If the authorities give in to that idea, disaster awaits.

The current purchase price is based on the cost of generation, the so-called “feed-in tariff”, which is estimated at about Bt6 per unit. Before that, a premium of Bt8 per unit was quoted for solar power. Reinstating the old formula would thus increase the overall electricity price for all households and businesses.

Needless to say, Thailand also needs to do more in terms of energy efficiency. Thanks to lower oil costs, electricity prices for January-April have been cut from the previous four-month round. As oil prices should stay low for some time, companies may defer their investment in this regard. But if oil prices spike up unexpectedly, this would boost their electricity bills and the country’s energy imports.

Aside from bills, we need to be aware that humans have generated as much greenhouse gas in the last 150 years as was produced over thousands of years previously. 

Low prices are good, but lack of preparation for a shift to the opposite could be costly.