Retail prices of diesel mid November 2010 (Brent was at $81 / barrel)

2. Retail prices of diesel mid November 2010 (Brent was at $81 / barrel) Thai retail petrol prices are relatively low, considering its reliance on foreign oil

3. Thailand has among the highest oil intensity in the world

6. Implications of higher oil prices on Thai economic performance • Good news: Thai economy is now in better condition to cope with oil shocks compared to the first two oil shocks. • Lower energy intensity and less reliance on oil as input for electricity generation • Bad news: overall, we are still relatively vulnerable to further oil price spike or supply disruption • High import dependency: • 90% of oil consumption, 70% of overall energy • Net oil import value accounts for 7% of nominal GDP in 2010 • High concentration risk esp. by relying heavily on natural gas for electricity generation • High energy intensity, esp. oil intensity among the highest, by international standard • High CO2 intensity which contribute to green house effect and may subject Thailand to potential trade barrier in the future

7. Energy Trap for Thailand? Most OECD in Asia have higher import dependency, but lower energy intensity. While China and India have lower import dependency but higher energy intensity. However, these countries have closed the gap on energy intensity very fast. Source: Thaicharoen et al, The end of low oil price, BOT symposium 2006

9. “Invisible Costs/Risks” of Energy Subsidy • Create additional macro risks: subsidy without exit strategy • Inefficient use of resources: • most of the benefits from universal petroleum subsidies accrue to high-income households • For diesel and LPG universal subsidies in sample of developing countries, over 65 percent and 70 percent of benefits go to the richest 40 percent of households, respectively. (IMF SPN/10/05) • Leakage to neighboring countries • Would be better to use resources for targeted subsidy or build public transportation system • Distortion of production and consumption  long run inefficiency • Discourage alternative energy

10. Lesson from 2004-2005 on implications of oil subsidy on macro performance

11. Price signals matter: LPG subsidies

12. Appropriate policy responses 1. Safeguarding macro and financial stability • Gradual normalization process for monetary and fiscal policy stances • Price control and universal fuel subsidies may limit impacts on short run but could result in much greater inefficiency and macro risks later on • Allow FX to move in line with regional currencies but can intervene if there is excess volatility of FX movement • Promote outflows to have a more balance capital flows and benefit from global financial integration • May need considering appropriate macroprudential measures to manage financial imbalances.

13. Reforming subsidy • Gradual move to targeted subsidy . • Could be a package of short-term measures to mitigate the adverse impact of higher fuel prices • Promote transparency of energy pricing policy / clear operational guideline for the Oil Fund • Overcome vested interest • Enhancing economic resiliency to the high and volatile food and fuel prices • Promote greater risk management capability for HH and business • Use effective carrot and stick policy to encourage greater use of energy efficiency • Clear plan and close coordination among agencies to promote alternative energy