[PBN] Bangkok: Oil slump brings new threats

From: bangkok Post - 20/10/2008

Consumers fretting about the decline in share prices and retirement savings over the past few weeks can at least take heart from one fact - the sharp fall in oil prices is equivalent to a tax refund for motorists across the world.

Oil prices, which soared to a peak of more than $147 per barrel in mid-July, have since collapsed to just over $70. Goldman Sachs, which in May shocked the markets with a price target of $200 per barrel, last week recanted and said oil could fall to $50 due to lower demand as the world economy heads into a recession in 2009.

Thailand, a relatively inefficient user of energy, stands to benefit considerably from lower oil prices. Oil represents the single largest item in the country's import bill, and lower costs should help balance the trade account if export growth slows in 2009 as many anticipate.

But for policymakers and some motorists, the sharp decline in fuel prices raise questions about whether to continue with investments in alternative fuels even as the price benefits compared with petroleum have fallen sharply.

PTT Plc, the country's largest energy company, says demand for natural gas for vehicles (NGV) remains strong.

"Motorists continue to shift to NGV systems every day," said Nuttachat Charuchinda, senior executive vice-president of PTT's gas business group. But he agreed that the decline in petrol prices would reduce the incentives for some to convert to NGV.

"At mid-year, when petrol prices hit their peak, we saw 500 vehicles per day installing NGV kits. The rate has since fallen by half," Mr Nuttachat said.

Assuming crude prices remain at current levels, PTT estimates NGV usage to rise just 7% this year to 3,000 tonnes per day by the end of the year, compared with previous forecasts of 17% growth to 3,200 tonnes per day.

NGV-compatible vehicles are now estimated to reach 126,000 by the end of the year, compared with earlier forecasts of 134,000. About 115,800 vehicles are now using natural gas.

Mr Nuttachat said that already, complaints were being heard from garages that specialise in NGV installations, both for passenger cars as well as for transport trucks.

Heavily subsidised NGV prices have remained stable all year, at 8.50 baht per kg. Petrol prices meanwhile, have fallen from as high as 45 baht per litre in July to just 32 baht as of last week. Gasohol blends have fallen in price even faster, to just 24-25 baht per litre, on par with diesel.

According to PTT, even at today's prices, a shift to NGV still makes financial sense, as NGV still has a per-kilometre running cost of just one-third that of petrol and diesel.

But certainly the decline in oil prices means that recouping one's investment will take longer than when before. For some motorists, the inconvenience of NGV - lack of refilling stations, reduction in trunk space, slower acceleration and limited driving range - now outweighs the potential financial gains.

This has policymakers concerned. National NGV and biofuel strategies are predicated on the thought that Thailand needs to reduce its dependence on imported crude oil. Any falloff in demand for alternative fuel systems has massive implications across companies in the supply chain that have been preparing to ramp up investment to support state energy policies.

PTT, for instance, is already rethinking its expansion plans as demand targets now look to fall short. Authorities have been targeting NGV usage reaching 8,000 tonnes per day by 2012, or 20% of total fuel use by the transport sector.

"If crude prices stay like this, we will definitely need to revise our plans to expand our NGV stations and capacity," Mr Nuttachat said.

The Energy Policy and Planning Office, part of the Energy Ministry, acknowledges that the sharp correction in oil prices has undermined previous energy forecasts.

Viraphol Jirapraditkul, the EPPO director-general, said use of both LPG and NGV by motorists was likely to fall over the next few months.

"It was the sharp increase in petrol prices in the middle of the year that caused vehicle owners to switch to alternative energy," he said. "With prices now declining, the incentive has also declined."

But energy experts say that even with the decline in oil prices, the long-term trend for higher fossil-fuel prices remains unchanged, as supplies remain limited while demand will eventually recover with the world economy.

PTT president Prasert Bunsumpun said the government should take advantage of the current situation and revise its tax structures to maintain price incentives for alternative fuels.

The State Oil Fund currently charges levies of four baht per litre for premium petrol, compared with 0.85 baht to 1.35 baht for gasohol and 1.20 baht for diesel.

Outright subsidies for gasohol fuels or raising tariffs for petrol and diesel would help maintain market momentum for motorists to shift to alternative fuels.

Ethanol producers have also called for the government to revamp its tax strategies, particularly considering that ethanol benchmark prices have jumped sharply with the price of agricultural commodities.

Chalush Chinthammit, deputy general-secretary of Thai Sugar and Bio-Energy Producers Association, suggested the government should set a benchmark price based on domestic agriculture products, instead of using rates in Brazil, the world's biggest and most successful ethanol producer, as the benchmark.

The ethanol price for the quarter that began on Oct 1 was set at 22.11 baht per litre, and biofuel for mixing with diesel is 25.67 baht compared to a wholesale price averaging 18-19 baht for refined-oil products.

"If the government overlooks this issue, the surplus of ethanol will worsen. Producers with licences will be more reluctant to start investing," Mr Chalush said.

"And if crude oil prices turn upward, we will be back to the same problem. The government should try to continue the momentum toward alternative fuels."

Ethanol output this month is expected to stand at 800,000 litres a day, compared to full capacity of one million litres, with the additional 200,000 litres of capacity estimated to enter into the market by year-end.

Source: http://www.bangkokpost.com/201008_Business/20Oct2008_biz23.php