VZCZCXRO3530
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #2617/01 1240448
ZNR UUUUU ZZH
P 040448Z MAY 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC PRIORITY 8334
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHCHI/AMCONSUL CHIANG MAI PRIORITY 1728
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 BANGKOK 002617 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON ELTN EPET TH
SUBJECT: THAILAND:  NEW PRICING POLICY REINTRODUCES DIESEL 
SUBSIDY 
 
 
BANGKOK 00002617  001.2 OF 003 
 
 
¶1.  (U) SUMMARY:  On April 26, after weeks of popular outcry 
over high fuel prices, Thailand's Ministry of Energy 
announced several fuel pricing measures that had the effect 
of reducing the pump price of diesel.  Rather than 
introducing a direct subsidy, the government reduced 
contributions from retail sales to pay off the debt that 
remains as a result of the direct subsidy paid in 2004-2005. 
Editorial and expert opinion have criticized the effort to 
lower fuel prices as price-distorting and self-defeating 
because it does not assist in reducing demand for fuel.  The 
Royal Thai Government feels it has to act, both to 
demonstrate its responsiveness to the concerns of ordinary 
laborers and the poor, and to undercut criticism of its 
policy of privatization of state-owned enterprises.  END 
SUMMARY 
 
------------------------------------ 
A NEW DIESEL SUBSIDY IN ALL BUT NAME 
------------------------------------ 
 
¶2.  (U) On April 26, 2006, the Ministry of Energy (MOE) 
decided to cut the contribution to the State Oil Fund (SOF) 
from retail disel sales by one baht per liter.  The effect 
was to reduce the pump price of diesel.  PTT Plc has reduced 
the retail price of diesel to 25.69 baht/ltr., and other 
retail vendors followed, although the other vendors' prices 
are higher than the PTT price and on May 4 retailers other 
than PTT and Shell implemented an across the board increase 
in prices brought the diesel price back up again (to 26.59 
baht/ltr.; Shell charges 26.09 baht/ltr.).  The MOE also 
decided on a two-baht reduction in the price of so-called 
purple diesel, a special high-sulfur fuel sold to small 
fishing vessels.  Additionally, the MOE announced a subsidy 
for bus operators of one baht per liter for diesel fuel. The 
economic effect of these decisions is to subsidize the price 
of diesel fuel.  The MOE is considering cutting excise taxes, 
among other measures to ease the burden on consumers, if oil 
prices continue to rise. 
 
¶3.  (U) The MOE decision follows weeks of popular outcry over 
rising fuel prices and the effect they have had on several 
sectors of the economy. The Thai press has carried daily 
stories of how high fuel costs have crippled fishermen, 
farmers, manufacturers, truckers, and transport operators 
such as the Bangkok Mass Transit Authority.  Although 
journalists have not emphasized the point, the essential 
problem in all affected sectors is that businesses are unable 
to pass on high fuel costs to consumers.  Bus fares are 
regulated and margins in the transport sector are thin, for 
example, thus an increase in fuel costs quickly pushes bus 
companies' operations into the red. The fishing industry, by 
contrast, simply lacks pricing power because consumers can 
choose other products if seafood prices rise. 6 percent 
inflation in April is also squeezing margins on the 
manufacture of the consumer products subject to price 
controls (over 150 items in one form or another). 
 
¶4.  (U) Supply constraints have exacerbated problems 
associated with the rise in diesel prices. Oil distilling 
facilities at Bangchak Petroleum Plc have been temporarily 
closed for repairs, and diesel imported by oil firms carries 
a higher price.  In April the RTG attempted to remedy 
shortages by setting up a quota system for allocation of fuel 
to bus operators.  The effect, however, was to squeeze supply 
further.  Transport operators, for example, reportedly had to 
pay one baht per liter above regular (regulated) rates for 
fuel in order to obtain diesel. Small fishing boat operators 
simply kept their trawlers in port, unable to obtain 
sufficient fuel on the regular market and unable to afford 
black market prices. Estimates vary, but all place at least 
1,000 boats in port. 
 
¶5.  (U) The RTG has attempted to shield the public from 
surging oil prices for several reasons.  Most popular anger 
over higher fuel prices is likely to be directed at the 
incumbent government if it does nothing, according to 
Prudhisan Jumbala, a political scientist at Chulalongkorn 
University.  The Thaksin government in particular has based 
much of its electoral appeal on the strength of its 
commitment to addressing the concerns of ordinary laborers 
and the poor.  The RTG's policy of privatizing state-owned 
enterprises  -- among them petroleum giant PTT -- has also 
come under fire recently, and both the RTG and PTT have 
attempted to use fuel price manipulation to uncercut this 
criticism.  As PTT Presdient Prasert Bunsumpun commented to 
the press on May 2, "Since our company is mainly owned by the 
 
BANGKOK 00002617  002.2 OF 003 
 
 
government and a lot of Thai people, there is no reason the 
firm will run business in a way that exploits consumers." 
 
--------------------------------------------- --- 
WHILE THE DEBT FROM THE PREVIOUS SUBSIDY REMAINS 
--------------------------------------------- --- 
 
¶6.  (U) Under the new arrangement, the SOF receives only 90 
satang for every liter of diesel sold on the retail market, 
down from 1.90 baht previously (one baht consists of 100 
satang). Energy Minister Viset Choopiban acknowledged that 
the reduction in money collected for the oil fund will total 
about 1.5 billion baht per month.  The MOE is expected to 
receive 2.5 billion baht from retail fuel sales, down from 4 
billion baht. 
 
 
¶7.  (U) The SOF was originally set up to reduce pump price 
volatility and to give rural communities a cheap energy 
source.  In 2004-2005, the fund spent over 80 billion baht to 
keep fuel prices artificially low through a diesel subsidy. 
The government of Prime Minister Thaksin Shinawatra decided 
to abandon this costly policy after its reelection in 
February 2005.  The government is still paying off 26.4 
billion baht in bonds to fund the debt accumulated from the 
previous subsidy scheme. As a result of the decision to cut 
the contribution to the SOF, the Energy Policy and Planning 
Office (EPPO) had to reschedule loan payments with creditors. 
 
--------------------------------------------- -------- 
CRITICS: STOP-GAPS HURT EFFORTS TO REDUCE CONSUMPTION 
--------------------------------------------- -------- 
 
¶8.  (U) The government's announcement of the new subsidies 
had the intended effect of dissipating consumer discontent. 
Complaints have fallen off.  Inter-provincial bus operators 
who had been planning to raise fares or go on strike if the 
RTG did not cap diesel prices called off their strike plan 
after the MOE announced the subsidy.  Newspapers have carried 
stories on PTT's plan to spin off a subsidiary oil refinery 
rather than on calls to probe oil company profits. 
 
¶9.  (U) Editorial and expert opinion, however, has been 
critical.  Post Today editorialized that "The price 
intervention is a price distortion.  By keeping the diesel 
price low, the government is hurting its own efforts to 
encourage people to reduce oil consumption.  Users of diesel 
oil will not be compelled to economise when the price is 
low." Tharn Settakij expressed its sympathy for those with 
low income, but noted that the problem of high fuel prices 
will not go away if Thailand continues to consume fuel at the 
present rate. 
 
¶10.  (U) Almost all observers agree that the subsidy is only 
a short-term fix, and that the RTG is betting on world fuel 
prices going down.  At a Stock Exchange of Thailand 
roundtable discussion on the day the subsidy was announced, 
however, company executives voiced concern of $100/barrel 
oil.  The effect of high oil prices is exacerbated by 
Thailand's extremely low energy efficiency and lack of 
domestic oil supply. 
 
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COMMENT 
------- 
 
¶11. The new subsidies distort the Thai fuel market and raise 
concerns about both the ability of Thailand's economy to 
adapt to change and the attractiveness of the investment 
climate.  By their very nature, the RTG-imposed controls on 
certain consumer products and materials such as steel and 
cement impede the ability of the economy to adapt to changing 
fuel prices because they lead to shortages and bottlenecks in 
an inflationary environment. No one knows the level at which 
the price of a given item would peak if controls were lifted, 
so it is hard for businesses to make informed investment 
decisions.  Owing to the political sensitivity of the diesel 
price, it is hard for the government not to intervene, 
especially since direct diesel subsidies ended only last 
July.  Yet such resort to using PTT diesel pricing policy as 
a way of setting retail prices sets a disturbing precedent. 
It shows the limits of the actual privatization of Thailand's 
state owned enterprises.  Additionally, minority shareholders 
in the partially privatized PTT are clearly being deprived of 
potential profit.  Such manipulation of the market by the 
majority shareholder sends the wrong signal to potential 
 
BANGKOK 00002617  003.2 OF 003 
 
 
investors. 
BOYCE