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16 May 2008


Runaway Oil Prices: Thailand Hastily Needs to Cut Consumption (Business Brief No.2169)

Global oil prices keep rising relentlessly. If inflation is factored out, oil prices recorded since November 2007 have broken the historically-highs of those seen during the Iran-Iraq War (1980-1984). The prices of benchmark crude, West Texas Intermediate (WTI), and others have risen steadily since the end of 2006 and are expected to continue their momentum in the future. On May 13, 2008, the price of WTI hit a record high of USD126.8/barrel, prompting widespread speculation among analysts that it might reach USD150-200/barrel next year. The question that many observers are concerned about is what factors have actually caused these dramatic increases in oil prices so far.
In summary, the continual increases in oil prices have not only been caused by supply-demand fundamentals, but also several other factors, including higher production costs, concerns about future oil supplies, the weakening USD, and volatility in capital markets, which are responsible for prevalent speculation in the global oil market.
KASIKORN RESEARCH CENTER (KResearch) forecasts that the price of WTI and others will continue their upward trends and likely reach USD150/barrel next year if the global oil market is still plagued by negative factors, including conflicts in the Middle East, the depreciating USD and volatility in capital markets, which could result in a possible shortfalls in oil supplies. Nevertheless, global oil prices might decline if concerns about these negative factors are overshadowed by positive news, such as the discovery of new oil reserves, new low-cost alternative energy technology, a more stable USD as well as less volatile capital markets, which could help dampen speculation on oil prices in the world market.

Inevitably, the Thai economy is being affected by rising oil prices, because domestic oil consumption as a ratio of the GDP is higher than leading economies such as the US, Japan, China and India. If the average price of WTI – as a nominal indicator – climbs to USD110/barrel in 2008 (up 50% over 2007), it is expected that the Thai economy will decline by 1.8% (if other factors remain constant) and inflation would surge 2.3% over the normal period. Nevertheless, steady growth in Thai exports, higher farm income driven by higher commodity prices and the government's stimuli are expected to help spur growth in the Thai economy to not less than 4.9%, while the average inflation in 2008 should be around 5%; thus somewhat higher than the 2.3% of last year. Noticeably, surging oil prices have dealt a big blow to the Thai economy, so the government should expedite measures to help ease the impact of these high oil prices, while Thais should also try to cut individual use of fuel to help lessen any future impacts.

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