“There is no way out of crude oil dependency”.

A review on the article :“Does biodiesel demand affect palm oil prices in Thailand?”

By: Shahab Sabahi, Policy analyst in Energy Security and Policy Research Group

In an article in the Journal of Energy for Sustainable Development, 2013; Chongprode Kochaphum et al examine the biodiesel development policy in Thailand. Through a lucid analysis, they caution few socio-economic impacts that the Thai biodiesel development plan would bring about. By employing demand-supply functions and analyzing the datasets of Thailand’s economy over the period 2006 and 2011, even if a short time span, they reveal that potential increases in the palm oil products would burden a net negative impact on the Thailand economy and society. However their findings show a reduction in crude oil import and a rise in farmer’s income as the positive impact of the biodiesel development policy. They, furthermore, highlight the degree to which net negative impacts are exacerbated when the crude oil price and demand for biodiesel increase with carrying out a sensitivity analysis.

The scope of Chongprode Kochaphum et al’s analysis was confined to the Thailand biodiesel domestic market and the import and export and related international trade variables were excluded [The article Page 2; Methodology, Price estimation]. This scope was implicitly disclosed a fact that a partial equilibrium and a static demand-supply analysis was employed by the article. Moreover this scope was formed an assumption which led to unrealistically calculation of average price. 

For the purpose of encouraging and opening fronts for future researches,  I would like to make few remarks on some of the article’s assumptions / views /conclusion statements as follows:

1.       The article introduced a term so-called “currency saving”. It appeared first in the article’s abstract without a definite definition. Readers might confuse the term with “balance of payment savings” which refers to national’s foreign current account. However the article clearly termed “currency saving” as “oil import reduction” [Page 2; Goal and scope of study]. With this definition, my perception from the article’s findings is that  

·         Biodiesel development will replace some “Volume” of the imported crude oil and does not necessarily translate to a “Surplus in balance of payment” by saving the “Monetary Value” of the imported crude oil. The article calculated its so-called “currency saving” with simply multiplying the average diesel price of the domestic  market by the replacement volume of diesel producing by palm oil instead of crude oil. The view failed to consider the facts firstly the Thai government pays “foreign hard currency” NOT “Thai Baht” to acquire “crude oil”  and the and secondly Thailand is a net imported crude oil commodity and the “Thailand balance of payment” whose status show “currency surplus” or “currency deficit” significantly links to the value of Thai Baht-US Dollar exchange rate. Make any judgment about “money currency saving” requires a broader international trade and finance consideration that the article’s scope falls short for taking them into the account. 

·         The value of Thai Baht had been appreciating about 26 percent during the period 2006 to 2011 [the Bank of Thailand statistics]. This development made importing crude oil would be cheaper than producing indigenous fuels production as the domestic business costs soared (Long Range Aggregated Supply LRAS)  and became more expensive, even with the presence of subsidy, to produce biodiesel and even cooking oil [the Bank of Thailand CPI and Total Factor Productivity report]. Indeed the Thailand economic growth and Direct Foreign Investment caused to boost upper the value of the Baht (an analysis on the Long Range Aggregated Supply can reveal the drivers of growth and price shift).  To consider effects of this development an “adjusting prices” mechanism is required. The effects of this development should be implicit in every “calculated average prices”. For the sake of estimating an “adjusted average diesel price” considering this mechanism, my rough calculation shows an “adjusted average diesel price” of between 4 to 7 Baht / liter instead of 16 Baht/liter that the article calculation assumed the latter one. Thus the positive contribution that the article called “currency saving” should be roughly halved (far less than half) than the article’s calculated figure which would shift the net cost-benefit balance in favor of more costs.    

2.       The article found that the price of cooking oil would increase in the Thailand domestic market. Since the article had excluded any impacts from importing cooking oil, they concluded a reduction in the net income of farmer.  If the exclusion assumption would be relaxed, a new conclusion might emerge which would be close to reality. In theory it is arguable. As the article calculated an increase of farmer income and a rise in the cooking oil price in domestic market, there would be a point in the time that imported cooking oil would be cheaper than the domestic one. This would create a dynamic to shift from consuming local cooking oil to imported one. This dynamic would play a trade-off between disposable income- consumption of farmers to a new improved balance status.

Therefore a reduction in net income of farmer may not be a conclusion. It depends on the value of the marginal propensity to consume and other socio-economic factors. The figures in an article “Wealth effects and Consumption in Thailand” in 2011 by Phurichai Rungcharoenkitkul -The Bank of Thailand, support this argument. 

However I would like draw my own conclusion from the article’s analysis:

 “There is no way out of crude oil dependency”.  

True, this is what the article’s findings revealed to me. The article sensitivity analysis has more stories to tell. The sensitivity analysis shows changes in crude oil prices will considerably shift the price of biodiesel which in its own determines that biodiesel production would be economically feasible or not.  Even demand of energy plays its role to make this new creature; biodiesel; being viable in an economy or not.

No matter if a nation is able to produce biodiesel and consequently, likely, cut its crude oil imports, the inconvenience truth is that  movements in crude oil market, determinants of monetary and foreign policies shape the nation’s energy security policy formulation [energy security which is defined “accessible, affordable and sustainable supply of energy”]

As long as this conventional source of “easy” energy is at hand and in part monetary policies pegs to this source of energy, indigenous biodiesel development remains a shadow in the economic system.