Oil prices have risen in recent months. In March, crude oil reached levels last seen a decade ago, trading on the European spot market at around $117 a barrel, a significant uptick from the $18.38 it was in in April 2020. This in turn leads to a higher cost 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 indirect effects. Politically highlighted it is that it irritates people, because no one likes to pay higher prices for a commodity like the gasoline that they need 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 breaks, rationing, and other market interventions.
But higher prices could serve another purpose, which is to keep people away from fossil fuels and toward more forms of renewable energy faster than they would otherwise have. Since high prices make people angry, if they stay high long enough, people will abandon fuel-guzzling cars and resort to public transportation or electric vehicles. I realize these may not be terribly realistic alternatives for many consumers in Southeast Asia right now, but that’s kind of the point – if prices stay high long enough, governments will have to take them more seriously.
In other words, managing the impact of higher oil prices involves trade-offs. In some cases, prices can be curbed for the sake of political stability. But it can also be passed on to consumers, which is likely to accelerate the shift toward cleaner, more sustainable patterns of energy consumption. This will involve some pain and discomfort in the short and medium term, but can eventually lead to a desirable outcome in the long term.
In Southeast Asia, we are seeing little of both, as individual governments weigh their comparative advantages and the trade-offs involved in managing high oil prices. We can learn a bit about these trade-offs by looking at how high oil prices are transmitted to the retail gasoline markets in Thailand and Indonesia.
Gas in Thailand is sold by many different companies, including state-owned PTT as well as companies such as Shell and ExxonMobil. There are subsidies and price caps, but part of the higher oil prices are generally passed on to consumers. As a result, the price of unleaded gasoline in Thailand nearly doubled from 26.56 baht per liter in May 2020 to 49.51 baht two years later.
By contrast, Indonesia’s Pertamax premium saw only one price increase in April, when it rose about 30 percent. The price of pertalite, a low-octane fuel, has not risen at all. Stabilizing these prices in the face of rising oil prices is costing the state-owned oil and gas company Pertamina, which has a virtual monopoly on retail gasoline, billions of dollars as it eats up the price difference. Some of these losses are covered by subsidies, but the real reason Pertamina wants to incur them is because it is politically beneficial to its sole owner – the government of Indonesia.
Indonesia has made the choice to keep prices low and stable, and is in a better position to do so than Thailand because Indonesia has historically been an oil producing country. (Its oil reserves are declining, but that is a topic for another time). Meanwhile, Thailand passes on some of these higher costs to consumers and is generally less able to curb higher prices because it is a net importer of energy and does not want to run into a large budget deficit.
This, in my estimation, was a major reason why Thailand has made decent progress in transitioning to cleaner forms of energy consumption: they don’t really have a choice. This current wave of higher oil prices is likely to simply accelerate this trend while reinforcing the strategic imperative to move faster. This is true for other net energy importers, such as Vietnam and the Philippines.
Countries with more oil and gas at their disposal, such as Malaysia and Indonesia, act on different political-economic calculations and therefore have different incentives. Because they are able to control prices to some extent during times of oil market volatility, they tend to do so in the interest of political stability. This does not mean that such countries are unable to switch away from consuming fossil fuels. It is just that the high price of oil as determined by market forces is unlikely to be the catalyst.