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Published on November 6, 2007

The Surayud government's decision to temporarily reduce the mandatory contributions from oil retailers to the Oil Fund by 40 satang per litre as part of an attempt to cushion the impact of rising world oil prices makes good sense in terms of economic management. Although the reduction in contributions will result in substantially less money going into the Oil Fund each month, that is a small price to pay, as this move will help stabilise the Thai economy. By keeping domestic oil prices stable, it is hoped that the government will be able to persuade manufacturers and transport operators to hold off raising the prices of goods and services, thus enabling the government to keep inflationary pressure at bay as well as to retain Thai exporters' competitive edge.

The reduction of mandatory contributions to the Oil Fund, which went into effect yesterday, is a temporary measure. The government has the option to reduce mandatory contributions by another 10 satang per litre if world oil prices rise further. Octane-95 petrol is exempted from the measure and its price will therefore rise in tandem with world oil prices.

The trade-off for the time being is that the Oil Fund will be deprived of approximately Bt800 million a month. The Oil Fund is now supposed to repay all its debts by January or February 2008 instead of this December as previously scheduled. The move will also delay plans to set aside 50 satang per litre of contributions to the Oil Fund for investments in the rail-based mass-transit system in Bangkok and its environs.

The benefits far outweigh the costs. The government is doing the right thing by trying to stabilise the sluggish economy, which is being buffeted by both political uncertainty and global economic turmoil. The government must, however, lift the measure, which is a form of virtual subsidy, as soon as world oil prices stabilise and even off.

The reduction in contributions does not apply to octane-95 petrol, the price of which will move in line with world oil prices. The government intends to maintain the price gap between octane-95 petrol and gasohol to persuade people to switch to gasohol, which is made from a mixture of petrol and ethanol.

All things considered, this is a principled approach taken by the government towards economic management.

It took this government only about one year to do away with the huge debt incurred by the Oil Fund during the Thaksin government. Thaksin obstinately provided state subsidies to keep domestic oil prices artificially low, which was unprincipled and ran counter to market mechanisms. That was part of the populism that has put this country at risk to long-term liabilities.

Thaksin's poor judgement and miscalculations and his penchant for populist policies should serve as a lesson as to why Thailand cannot fall into the trap of populism again.

Thaksin first implemented oil subsidies during the war in Iraq and reintroduced them again on January 10, 2004. He was forced to abandon the wrong-headed policy in the first quarter of 2005, by which time the Oil Fund was almost Bt100 billion in the red.

At the height of this folly, Thaksin used taxpayers' money to provide subsidies of between Bt3 to Bt5 per litre.

The government's efforts to cushion the impact of world oil price movements must be supplemented with concrete measures on energy efficiency in all sectors of the economy. Diversifying main energy sources for the production of electricity will be very important in the effort to reduce dependence on oil to generate electricity.

It is crucial for Thailand to come up with the right mix of energy sources, including renewable energies such as wind and solar power or even nuclear energy, which must be judged against the highest international standards in terms of safety and sustainability.

Obviously, a lot more needs to be done to educate members of the public on how they can contribute to energy conservation.

There is still room for improvement in terms of energy efficiency and logistics. All possible measures must be explored to cut back on energy consumption, including a campaign to replace the ubiquitous incandescent light bulbs with energy-saving fluorescent bulbs, which can translate into about 10 per cent of the total power currently consumed for lighting.

The Nation