The Socioeconomic Impact of Energy Security in Southeast Asia

1. The Socioeconomic Impact of Energy Security in Southeast Asia By Maria Nimfa F. Mendoza School of Economics University of the Philippines

2. Presentation Outline • Overview: economy and energy sector energy policies – fuel subsidies • Macroeconomic effects Macro effects: inflation, interest rates, currencies, trade, growth Taxation Regional trade and cooperation in energy • Microeconomic effects Supply response: biofuels, renewable energy for power generation Demand response: sectoral responses; poverty and rural development • Policy options, questions

3. Overview: the economy and energy • Differences in general income levels, stages of development resources

6. Resources of Southeast Asia • abundant supply of natural gas, coal and hydropower • heavily dependent on crude oil imports from the Middle East • Brunei: major oil, natural gas producer • Indonesia, Malaysia: substantial oil and natural gas reserves • Malaysia: net oil exporter

7. Resources of Southeast Asia • Indonesia: net oil importer, SE Asia’s largest oil user; coal exporter • Myanmar: oil, natural gas reserves • Vietnam, Philippines: exploration being undertaken • Philippines: coal producer, second largest producer of geothermal energy • Singapore: major oil refining center • Nuclear option: Vietnam, Indonesia, Malaysia, Thailand, Philippines, Myanmar Earliest: 2020 (likely Vietnam)

8. Energy Use • Fuel for transport, power generation • Regional (Asia and the Pacific) per capita electricityconsumption: 291 kwh a year (2004, ESCAP) • lowest in the world, except for Africa, but annual growth rate above world average • Energy consumption per capita • Energy consumption per GDP-PPP

10. Apparent consumption per unit of GDP, kilograms of oil equivalent per 1000 PPP dollars, 2004 Sources: ESCAP Statistical Yearbook for Asia and the Pacific 200 *Human Development Report 2007/2008

11. Overview: Energy Policies • Most SE Asian countries, except Singapore and the Philippines, have fuel subsidies • Fuel subsidies are generally skewed towards diesel fuel. Diesel, LPG and kerosene considered socially sensitive products • Most governments forced to increase fuel prices due to the fiscal burden of the subsidies (financing unsustainable) • Even after price adjustment, most fuel prices at the retail level remain below market rates

12. Overview: Energy Policies • Indonesia • Fuel prices increased by 28.7% in May 2008 • 2008 fuel subsidy estimated to be $20 billion, about 4% of GDP • 2008 electricity subsidy estimated to be $6.5 billion • Direct cash assistance to 19.1 million poor families

13. Overview: Energy Policies • Malaysia • 2008 oil and gas subsidies estimated to be $14 billion, about 7.5% of GDP • Starting September of this year, retail gasoline prices will be allowed to track global crude oil prices by fixing the subsidy at 0.30 ringgit ($0.09) per liter and adjusting monthly pump prices (variable retail price, fixed subsidy)

14. Overview: Energy Policies • Vietnam • Inflation has been a problem; imposed price controls in March 2008 on 10 “essential commodities” • State-owned companies incurred losses due to price controls • Domestic fuel prices raised by 36% in July 2008 • Though Vietnam is SE Asia’s third-largest crude oil producer, lacks refining capacity; first refinery to come on stream in 2009

15. Overview: Energy Policies • Cambodia, Myanmar, Laos • Cambodia: 2008 fuel subsidies estimated to be about 3.5% of GDP • Laos: 2008 fuel subsidies estimated to be less than 1% of GDP • Myanmar: Unexpected fuel price increases in August 2007 triggered violent public protests; urban poor severely affected due to increases in transport and food prices; high poverty incidence

16. Overview: Energy Policies • Brunei • Retail gasoline price at $0.40 a liter • 2007 fuel subsidies: $151 million, about 1% of GDP • Highest per capita electricity consumption in Asia Pacific region: 3167 kwh a year

17. Effects of fuel subsidies • Demand higher than what would have been without subsidies • Shift to net importer: Indonesia (oil), Malaysia (LPG) • Consumers do not face the true scarcity value, no incentive to conserve • Firms also have less incentive to develop alternative fuel and energy sources

18. Effects of fuel subsidies • Intergeneration concern: greater consumption today means less availability for future generations • Brunei (life of resource); Malaysia (Petronas’ profits) • More difficult for oil and electricity companies to pursue their commercial objectives independently of government’s social policies • Vietnam (state-owned enterprises); Philippines (National Power Corporation)

19. Alternatives to fuel subsidies • Objective: to help the poor • Broad fuel subsidies inefficient and costly due to leakages • Richer consumers and energy-intensive industries benefit more • Bias against labor-intensive industries, does not help employment generation for the middle and lower income classes • Indonesia: 2/3 of fuel subsidy goes to top 40% of the income distribution

20. Alternatives to fuel subsidies • Alternative: more targeted income support for poor families (short-term option) • Indonesia: cash assistance • Philippines: conditional cash transfers • Money spent for broad fuel subsidies can be spent on long-term government investments for education, health, infrastructure, etc.

21. Alternatives to fuel subsidies • Philippine experience with lifeline electricity rates • Significant leakages and more costly if threshold levels set high • Distortion in incentives to conserve • Significant proportion of the poor do not have access to electricity • Electrification rates in the region

22. Electrification rates, 2005 Source: Human Development Report 2007/2008

23. Socioeconomic impacts: macroeconomic • Macro effects • Oil exporters gain, oil importers face rising economic and social costs • Economic costs for oil importers • Rising inflation • Slower growth • Higher trade deficit (transfer of wealth) • Weaker fiscal positions, if slower growth results in less tax revenues and increased social spending, stimulus spending

24. Macro effects • Increase in inflation may lead to restrictive monetary policies to temper inflationary expectations • Higher interest rates are generally contractionary: results in slower economic growth • Transmission of high oil prices to other sectors • Higher transport and electricity prices, demand for wage increases, higher prices for goods produced • Higher energy prices can also contribute to higher food prices through fertilizer prices, fuel prices for farm equipment and higher distribution costs • Spillover to core inflation (excludes food and energy) • Inflation in Asia can be transmitted outside the region through export goods

25. Macro effects • International trade: increase in transportation (shipping) costs can lead to the “neighborhood effect”: manufacturers would locate nearer their suppliers and customers • Gain by trading with and receiving foreign direct investment from oil-rich countries • Malaysia: more tourists from Middle East • Philippines: more overseas Filipino workers demanded

26. Taxation of oil products • Rising oil prices as a source of government revenue • Political clamor for reduction or suspension of taxes on oil • Philippines: shift from ad valorem VAT to specific tax suspension of VAT on oil products • Tax revenue windfall can be used to finance short-term income support for the poor and long-term programs (education, health, infrastructure, etc.)

27. Regional trade and cooperation in energy • Natural gas exported from Indonesia to Singapore • ASEAN considers the feasibility of a 1,000-km linkage of natural gas pipeline from Indonesia’s Natuna gas field to Malaysia, Thailand, can further be routed to Brunei, Sarawak and the Philippines. • Hydropower from Laos sold to Thailand • The Philippines buys coal from Indonesia

28. Regional trade and cooperation in energy • PTT Exploration and Production (state-controlled Thai company): contracts to explore and develop oil and gas fields in Vietnam, Myanmar and Indonesia. • Thailand and Myanmar: plan to jointly build hydropower plants and dams. Myanmar: one of Thailand’s biggest sources of energy • Golden Hope Plantations (Malaysian state-run palm oil company): invested in biofuels, oil palm plantations in Indonesia. • Singapore: (Singapore Petroleum Company) active in upstream exploration and production of petroleum in Indonesia, Vietnam and Cambodia; also providing support services such as construction and repair of drilling rigs and service vessels.

29. Socioeconomic impacts: microeconomic • Economic principles • Economic agents, both energy producers and consumers, respond to changes in energy prices and adapt in the longer run. • It is generally expected that if the price of a good goes up, demand goes down and consumers shift to substitute goods. • In the longer run, the economy adapts to a perceived permanent change in relative prices, have greater scope for adjustment both on the supply and demand sides. • The direction of technological developments is also influenced by the price changes.

30. Supply response • The higher price of oil has made renewable, alternative green energy attractive. • Most forms of renewable energy rely on subsidies for financial viability. • The huge scale of the energy market provides opportunities for alternatives, such as wind turbines, to prove themselves at the margin and move to mainstream commercial scale when their cost, through technological improvements, has declined.

31. Biofuels • Philippines: coconut oil for coco diesel, sugarcane for bioethanol; jatropha (use of marginal land) • Indonesia and Malaysia: palm oil, jatropha • Singapore: development of second-generation biofuels technology • Also, in urban areas: • waste to fuel conversion • methane from landfills • used cooking oil of McDonald’s as fuel additive for the fleet cars of the city government of Manila

32. Renewable energy for power generation • In Southeast Asia, renewable energy usually used for rural off-grid electrification, with substantial government subsidy • Scaling up of renewable energy use for baseload power generation has not yet widely taken hold Two examples: • 8-MW Bangui Wind Power Project in a coastal area in Northern Luzon, Philippines • 950-KW two-hectare two-person solar power operation in Mindanao, Southern Philippines.

33. Renewable energy for power generation • Hydroelectric dams, such as those in the Greater Mekong Subregion, have been constructed in Southeast Asia to meet increased energy demands • social cost of population resettlement and environmental effects vs. social benefits of increased power availability and lower power rates • equity issue: the distribution of benefits, usually accruing to higher-income urban areas with higher demand for electricity, and costs borne by rural residents

34. Demand response • Greater incentive to pursue energy efficiency: more efficient lighting, development of more efficient appliances and energy labeling, more investments in better designed mass transit systems. • Change in travel patterns: less private vehicle driving, less kilometers driven, and greater use of public transportation (buses, water ferry systems) and mass transit systems → less traffic congestion in urban areas

35. Demand response • Shift in demand towards more fuel-efficient engines and smaller cars • Philippines: motorcycles • Vietnam: bicycles • Transportation costs to and from work for the average worker in developing countries can be a significant portion of their wages → may lead in the long run to higher densities in urban areas where most of the jobs are

36. Poverty and rural development • emergence of biofuels and the accompanying increase in demand for crops may provide an opportunity for rural development and poverty alleviation through agricultural development • some of the poor are shifting from kerosene and LPG to charcoal and fuelwood → health risks from indoor pollution

37. Poverty and rural development • rural areas with dispersed households and low demand for power due to low incomes: usually not economical to have grid-supplied electricity • renewable energy for rural missionary off-grid electrification: solar power, mini-hydro systems; projects usually require government subsidies

38. Policy options and questions • Energy efficiency, conservation and diversification • Oil not likely to be replaced in the near future • High oil prices provide an incentive for energy efficiency, conservation and diversification • Price distortions impede the long-run adjustment of the economy to the scarcity value of energy • Current problem with renewables and other alternative energy: commercial viability

39. Policy options and questions • Role of subsidies for promotion of alternative technologies • Learning curve, economies of scale • Absence of pollution taxes, carbon taxes → fossil fuels underpriced • Transition handled well → greener energy, better environmental quality, higher quality of life → agricultural, rural development, poverty reduction

40. Policy options and questions • Energy interdependence among countries • Greater regional cooperation and trade in energy to diversify away from Middle East oil