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Published on November 10, 2007

Bankers have warned the government that the reduction of retailers' contributions to the Oil Fund in order to delay hikes in pump prices should be short-lived. Otherwise, the move will lead to market distortion, as motorists might not reduce their usage, which is what happened two years ago.

Kasikornbank president Prasarn Trairatvorakul yesterday said the government's latest fuel subsidy should be temporary, so as to allow drivers to react properly to rising oil prices.

A short-term subsidy is acceptable if the oil price escalates tremendously, but it should not cause the Oil Fund to go into the red. The fund's debt soared after the Thaksin Shinawatra government subsidised petrol consumption a few years ago, he said.

"The subsidy will distort the

market mechanism. Oil consumers will maintain their level of consumption and not adjust," he added.

The Energy Ministry cut the Oil Fund levy on retailers by Bt0.40 per litre from Monday for all types of fuel except premium 95-octane petrol, in a bid to maintain retail prices following a spike in global crude prices.

It said on Thursday that another reduction of Bt0.40 per litre was possible this coming Monday if spot prices in the Singapore market continued to rise. Market observers forecast that crude prices could reach US$120 (Bt3,966) per barrel after crossing the $100 mark a few days ago. The skyrocketing price stems from strong demand from China, coupled with speculation by hedge funds.

Siam Commercial Bank president Kannika Chalitaphorn said she believed in a free market because it would encourage reduction in oil consumption.

Though soaring oil prices push up the costs of goods and services, the stronger baht has somewhat cushioned the impact domstically, she said.

Apisak Tantivoranwong, president of Krung Thai Bank and the Thai Bankers Association, said rising oil prices would cause higher production costs, which would result in a global economic slowdown.

Prasarn said the adverse impact of crude oil at $120 a barrel would be tremendous, particularly if it were sustained at that level.

Kasikornbank projects that if Brent crude averages $77 a barrel next year, Thai economic growth will be 4-5.6 per cent and inflation 2.5 per cent. The economy will expand 4-5.3 per cent and inflation will be at 3.5 per cent if the price surges to $87, according to the bank.

Bank of Thailand Governor Tarisa Watanagase said the soaring oil price was an upside risk factor to the economy in addition to the US economic slowdown, as the Kingdom is largely dependent on oil.

"The greater the oil-price increase, the more the adverse impact on the economy. Our oil consumption as a proportion of gross domestic product is the highest in Asia, apart from Singapore," she said.

She asked the government to announce a clear policy on energy consumption, such as promotion of biodiesel, and said the public and private sectors should also reduce oil consumption.

Anoma Srisukkasem

 The Nation