The price of oil has skyrocketed in recent months. In March, crude oil hit levels last seen a decade ago, trading on the European spot market at around $ 117 a barrel, which was well above $ 18.38 in April 2020. time, it is driving up the cost of energy around the world and especially the price of gasoline (although crude oil has already started to drop a bit since March).
High oil prices have several ripple effects. The most important politically is that they piss people off because no one likes to pay higher prices for an essential commodity like the gasoline they have to use every day. For this reason, many political leaders have a vested interest in ensuring that gasoline prices remain stable and affordable and will go to great lengths to achieve this through subsidies, price caps, tax exemptions, rationing and other market interventions.
But the high prices may serve another purpose, which is to get people away from fossil fuels and more renewable forms of energy faster than they otherwise could. Because high prices piss people off, if they stay high long enough people will give up on gas-consuming cars and turn to public transport or electric vehicles. I realize they may not be terribly realistic alternatives for many consumers in Southeast Asia at the moment, but here’s the thing: if prices stay high long enough, governments will be forced to take them more seriously.
In other words, managing the impact of high oil prices involves trade-offs. In some cases, prices can be suppressed in the interest of political stability. But they can also be passed on to consumers, which is likely to accelerate the transition to cleaner and more sustainable ways of consuming energy. This will involve pain and disruption in the short to medium term, but can ultimately lead to a more desirable result in the long term.
In Southeast Asia we are seeing a little of both, as individual governments weigh their comparative advantages and the trade-offs involved in handling rising oil prices. We can learn something about these trade-offs by observing how high oil prices have been passed on to gasoline retail markets in Thailand and Indonesia.
Gas in Thailand is sold by several companies, including the state-owned PTT but also companies such as Shell and ExxonMobil. There are subsidies and price caps, but part of the oil price increase is generally passed on to consumers. As a result, the price of Thailand’s premium unleaded gasoline nearly doubled from 26.56 baht per liter in May 2020 to 49.51 baht two years later.
In contrast, Indonesia’s premium unleaded Pertamax saw only one price hike in April, when it rose about 30%. The price of Pertalite, a low-octane fuel, has not risen at all, and keeping these prices stable in the face of rising oil prices is costing the state-owned oil and gas company Pertamina, which has a virtual monopoly on retail sales. gasoline retail, billions of dollars while eating the price difference. Some of these losses are covered by subsidies, but the real reason Pertamina is willing to hire them is because it is politically beneficial to its sole owner: the government of Indonesia.
Indonesia has chosen to keep prices low and stable, and is in a better position to do so than Thailand because Indonesia has historically been a large oil producing country. (Its oil reserves are dwindling, but that’s a topic for another time). Thailand, meanwhile, passes on some of these higher costs to consumers and is generally less able to suppress high prices as they are net importers of energy and don’t like to have large budget deficits.
This was, in my view, one of the main reasons Thailand is making decent progress by switching to cleaner forms of energy use – they really don’t have a choice. The current wave of high oil prices is likely to accelerate this trend, while reinforcing the strategic need to move faster. And this applies to other net energy importers, such as Vietnam and the Philippines.
Countries with more oil and gas at their disposal, such as Malaysia and Indonesia, operate according to a different political-economic calculation and therefore have different incentives. Because they are able to control prices to some degree during times of volatility in the oil market, they tend to do so in the interest of political stability. This is not to say that these countries are unable to abandon the consumption of fossil fuels. It’s just that the high oil price set by market forces is unlikely to be the catalyst.