Higher oil prices have both obvious and hidden costs

Higher demand for corn and other agricultural products to produce more biofuels and fertilisers have driven up food prices. Rice prices jumped sharply in the first quarter, partly from higher demand due to a move away from corn and wheat to rice and partly from export restrictions and import increases to rebuild stocks in some countries.

Looking forward, prices of food and agricultural commodities are expected to decline somewhat, as supply responds to demand, although they will remain high compared with historical levels.

The combination of high oil and farm-product prices shows a mixed picture in terms of the trade gap, which measures the economic health of a country. A trade gap is the ratio between a country's export sales and its imports, and a fall in export value relative to imports means a country must export more in order to balance the value of the imports it receives.

Moreover, changes in this key relative value can have dynamic effects on real income and real purchasing power. With the country exporting rice and importing oil, higher rice prices will boost its export earnings and point to an improvement in our terms of trade. Conversely, higher oil prices cause a widening of the trade gap, because the country must pay more for its oil imports.

During the first four months of the year, Thailand's net oil-import value was five times higher than its net value of rice exports. Hence, soaring oil prices have widened the trade balance.

In addition to their effect on trade figures, surging oil prices are squeezing real incomes and aggregate demand, because higher domestic manufacturing output is needed to pay for the same volume of oil imports. Rising oil prices also squeeze supply in some sectors, such as the fishing industry, since more expensive oil may prompt companies to respond by cutting back on fishing activities.

Furthermore, higher oil prices also have a direct effect on inflation by pushing up consumer prices and an indirect effect by manufacturers and haulage firms passing on higher oil costs by raising their prices.

A highly oil-dependent economy like Thailand's is particularly vulnerable to surging oil prices. But corrective measures should not aim solely at decreasing oil dependency and improving energy efficiency.

Also, the government's energy policy-makers must look carefully at the development of an appropriate mix of measures to mitigate medium- and long-term environmental effects. Needless to say, saving energy is essential, and today is a good time to start.