ASEAN Beat | Economy | Southeast Asia

Thailand’s Brittle Defense Against Oil Shocks

The country is in a better position than its immediate neighbors, but the coming weeks are set to test Prime Minister Anutin’s new administration.

LNG and petrol tanks at Laem Chabang seaport in Chonburi Province, Thailand, Mar. 17, 2019.

It’s a grueling moment to lead a government. The U.S.-Israel war with Iran is driving severe economic disruptions and geopolitical volatilities that underscore the cold logic of hard power. Although Thailand’s defense against oil shocks looks better fortified than that of its mainland Southeast Asian neighbors, at least in immediate terms, the domestic verdict is not at all in favor of the Anutin Charnvirakul 2.0 administration.

The threats from rising oil prices are acute: worsening inflation, skyrocketing transportation and production costs, and reduced consumer purchasing power. It doesn’t help that Thailand is already trailing other Southeast Asian economies in growth and has alarmingly high household debt. Despite being somewhat self-sufficient in gas, Thailand’s crude oil production is limited, making a high import dependency of over 90 percent unavoidable.

With reference to a Krungsri Bank publication, nearly 60 percent of Thailand’s crude oil imports come from the Middle East, with 0.3 million barrels transiting through the Strait of Hormuz per day. Because crude oil from different sources gives different yields, and because Thailand’s complex refineries are geared toward Middle Eastern crude to maximize diesel production, shifting to alternatives is easier said than done. Based on last year’s data, 67 million liters of Thailand’s total 141 million liters of daily refined oil consumption were diesel.

Thailand does, however, have relative flexibility in how it manages its reserves and prices. First, Thailand has six main refineries, supposedly significant crude oil storage, and a refining capacity that ranks among ASEAN’s forefront, second only to Singapore and on par with Indonesia. In normal times, the output from Thai refineries exceeds domestic demand, thereby facilitating exports to regional states, including China. In emergencies, Thailand could halt exports to bolster its own national reserves. Currently, Thailand has halted all exports except to Laos and Myanmar, both of which play important roles in powering the Thai grid. That the official figure of reserves fluctuates, jumping from 61 to 103 days, is therefore not without reason.

Second, there’s the Oil Fuel Fund – generally financed through levies imposed on domestic fuel consumers – to provide subsidies for retail oil prices when needed, shielding ordinary Thais against price shocks. Subsidies obviously cannot work indefinitely and will be considered in more detail later. But now that Thailand has started lifting price caps to safeguard its fiscal stability, diesel prices continue to be substantially supported and remain within ASEAN’s more affordable tier.

There are other factors that have cushioned Thailand against oil shocks. The country’s facilitative atmosphere for electric vehicles, with a notable pool of current and prospective users, is one. More consequentially, as The Diplomat’s Sebastian Strangio wrote earlier this week, Thailand has proven successful in securing a passage arrangement with Iran. On March 23, a Thai oil tanker became the first in Southeast Asia to safely transit the Strait of Hormuz without having to pay a toll booth.

This is striking not so much because Thailand and Iran recently had a spell of friction after a Thai-flagged bulk carrier attempting to cross the Strait was struck by Iranian projectiles, but rather because Thailand is a formal U.S. ally. Indeed, just as cooperation with Iran was materializing, Thailand was welcoming a scheduled port call by the U.S. 7th Fleet flagship USS Blue Ridge. Moreover, Thailand has maintained perhaps the most visible ties with Israel out of any ASEAN nation as a tourism hub and labor provider. Altogether, a degree of Thai diplomatic brilliance cannot be........

© The Diplomat