Adding fuel to the fire

Bangkok Post

8 hours ago

The unpredictable Israel-Iran conflict is intensifying the disorder overwhelming the Pheu Thai Party's coalition government.
The withdrawal of the Bhumjaithai Party from the alliance, following a leaked phone conversation between Prime Minister Paetongtarn Shinawatra and former Cambodian premier Hun Sen, is destabilising the government, while steep US tariffs on Thai imports are scheduled to take effect on July 9.
The impact of the Israel-Iran war could deal a blow to the government, as US President Donald Trump cannot predict how tensions will play out after the two countries breached a ceasefire agreement he trumpeted last week.
The International Monetary Fund warned that global economic growth would be damaged if there is an oil supply shock, leading to higher crude prices and inflation if Iran decides to close the Strait of Hormuz, an oil shipping lane accounting for 20% of global consumption.
In addition, the impact of Trump's tariffs are expected to weaken international trade this year, according to the World Trade Organization.
The Joint Standing Committee on Commerce, Industry and Banking predicts the steep tariffs are one factor that will cause the Thai economy to grow by less than 1% in the second half of the year, leading to full-year GDP growth of 1.5-2%, down from an earlier projection of 2-2.2%.
This estimate was announced in early June before the Israel-Iran war broke out, meaning it did not factor in oil price volatility, the possibility of costlier power bills and other unpleasant impacts on businesses, including tourism, transport and exports.
ENERGY STABILITY
Authorities are working to ensure Thailand has sufficient oil reserves and prices remain relatively stable amid the unpredictable conflict.
The Energy Ministry declined to say how much the nation's oil reserves should increase to prepare for possible crude transport disruptions if the Strait of Hormuz is closed.
Energy Minister Pirapan Salirathavibhaga said the authorities need to carefully manage oil stocks to maintain a continuous and reliable supply because Thailand remains dependent on oil imports from the Middle East.
Up to 90% of domestic oil consumption is imported, and 60% of this is bought from the United Arab Emirates (UAE), Kuwait, Saudi Arabia and Oman, all of which ship oil to Thailand through the Strait of Hormuz.
"We will seek more crude oil from other regions to increase our oil reserves," said Mr Pirapan.
As of June 23, Thailand had oil reserves amounting to 60 days of use, comprising crude oil in the country (22 days), crude oil being transported here by tankers that have already passed the Strait of Hormuz (20 days), and refined oil (18 days).
A plan to increase oil reserves aligns with Mr Pirapan's earlier decision to develop Thailand's strategic petroleum reserve to enhance national oil security, said an energy official who requested anonymity.
He wants Thailand to increase its oil reserves, both crude and refined, to cover 90 days of use to ensure the country has sufficient oil in the event of unforeseen delivery disruptions by major suppliers.
Finance Minister Pichai Chunhavajira said domestic oil traders are required by law to maintain a legal reserve.
However, in practice oil traders also maintain their own reserves to support business partners, known as commercial reserves, which are typically higher than the legal reserves.
Thailand is both an energy importer and exporter. If a Middle East crisis occurs, all countries including Thailand will need to keep energy supplies within their borders, said Mr Pichai.
The Energy Ministry is also regulating domestic prices of diesel, gasoline and gasohol, a mix of gasoline and ethanol, to slow their increase in case the war intensifies.
The Oil Fuel Fund Office reduced diesel users' contributions to the Oil Fuel Fund and is subsidising the retail price of diesel through the fund, as the fuel is crucial for transport, logistics and the operations of many industries.
The fund also agreed to collect fewer contributions from users of gasoline and gasohol.
As of June 22, the fund has incurred losses of 35.4 billion baht.
Mr Pichai said using the Oil Fuel Fund to cushion fluctuations in oil prices should be done at an appropriate level, as a healthy economy should focus on revenue generation.
Mr Pirapan said the Energy Ministry is trying to keep fuels available at appropriate price levels, but he asked the public for cooperation.
"Please use energy more wisely to help Thailand reduce fuel imports," he said.
OIL PRICE IMPACT
Dhanakorn Kasetrsuwan, chairman of the Thai National Shippers' Council, said there is a high probability of oil price fluctuation and price increases despite Iran and Israel reaching a ceasefire agreement.
The tension remains unresolved as the historical conflict seems far from peaceful. New confrontations could erupt at any time if an attack occurs, regardless of who initiates it, he said.
The deployment of US and UK naval fleets to safeguard shipping lanes in the Strait of Hormuz has already increased insurance premiums and shipping costs.
Shipping is complicated by rerouting risks, such as avoiding high-risk areas and taking alternative routes.
Some ships may detour around Africa, which extends transit times and raises expenses.
Mr Dhanakorn said Thai exports could encounter tougher market conditions and higher expenses due to increased shipping costs, particularly for routes between Europe and the Middle East that previously relied on the Suez Canal.
An alternative route around the Cape of Good Hope could extend shipping times by 10-14 days.
Moreover, insurance premiums for vessels, particularly those transporting goods through the Red Sea, the Persian Gulf, and the Middle East, are expected to rise, he said.
"The situation in the Middle East is unpredictable, with potential trade disruptions from renewed conflicts," said Mr Dhanakorn.
"We must monitor developments in the region."
Higher oil prices will also impact land and air transport costs.
He said while the energy and petrochemical sectors will have higher production costs, they could benefit from increasing sales prices.
Meanwhile, logistics and transport businesses could struggle with increased costs and shrinking profit margins unless they adjust their prices in time, said Mr Dhanakorn.
Consumer goods in the domestic market are likely to face rising transport and raw material costs. Agricultural products and food will also have higher production costs, though demand for these products remains strong in Arab markets, he said.
Mr Dhanakorn anticipated heavy industries will face higher costs for imported raw materials and machinery.
Manufacturers that use oil for fuel will directly bear the brunt, while others that import or export raw materials and finished products will encounter an indirect impact as shipping costs, including freight, will increase, said Kriengkrai Thiennukul, chairman of the Federation of Thai Industries (FTI).
Rising oil prices will also increase aviation costs for tourism and airlines, said Mr Dhanakorn.
ADVICE FOR EXPORTERS
In the short term, Mr Dhanakorn advised exporters to review and adjust their transport routes for shipments to the Middle East or Europe.
He said they should negotiate with shipping agents in advance to evaluate costs and plan deliveries effectively.
Moreover, exporters must manage currency exchange risks and oil costs, said Mr Dhanakorn.
Maintaining close communication with clients to ensure they are informed on any possible delays or the need for rerouting is also important, he said.
For the medium to long term, exporters should diversify their markets to reduce reliance on the Middle East by seeking opportunities in Asia or Africa, said Mr Dhanakorn.
If air transport is urgently needed, it is important for exporters to prepare packaging and quantities suitable for those requirements, he said.
Exporters are advised to study free trade agreements and bilateral trade deals to identify tax-free trade opportunities and enhance their competitiveness.
Shippers should establish partnerships with logistics providers, who can offer multiple routes to ensure flexibility if needed, said Mr Dhanakorn.
NO FOWL PLAY
Kukrit Areepakorn, manager of the Thai Broiler Processing Exporters Association, said the ongoing conflict between Israel and Iran has not yet affected Thailand's chicken exports.
"Transport continues as usual and orders remain steady. Typically exporters place orders about three months in advance," he said.
The majority of Thailand's chicken exports to the Middle East are directed towards the UAE.
If one of the UAE's ports is closed, exporters have the option to reroute shipments to other destinations such as Oman.
However, Mr Kukrit said if the conflict persists and drives oil prices significantly higher, this could raise production costs for Thai chicken producers.
According to the Commerce Ministry, Thailand exported 9,394 tonnes of chicken worth 818 million baht to the UAE in the first five months of this year.
DIM TOURISM PROSPECTS
Thanet Supornsahasrungsi, president of the Association of Chon Buri Tourism Federation, said the Israel-Iran conflict could worsen Thai tourism and hotel operations, which are maintaining room rates due to weak travel confidence among short-haul markets such as China.
Mr Thanet said the conflict's volatility hampers tourism sentiment in the long-haul market, including the Middle East and Europe, as a large portion of visitors from the latter travel to Thailand via Middle Eastern carriers.
"Thailand is experiencing a severe low season, though everyone is expecting a surge of European and long-haul tourists for the year-end high season," he said.
"This forecast now seems uncertain."
The association's Chonburi Travel Mart event, scheduled for July, may not be joined by Middle Eastern agents due to their travel concerns, said Mr Thanet.
A prolonged conflict would also impact global economic growth, which could lead to a slowdown in travel and reduced spending budgets, he said.
If the government's fuel price control mechanisms are ineffective, this could mean higher operating expenses for hotels from gas prices, electricity fees, ingredients or transport, said Mr Thanet.
This year many hotels are discounting their rooms to attract more guests, unable to raise room prices as in the post-pandemic years when pent-up demand persisted, he said.
EXPENSIVE POWER BILLS
Thailand's power tariff, which is used to calculate electricity bills, is at 3.98 baht per kilowatt-hour (unit) through August.
Uncertainty in the Middle East means the rate may spike in the last four months because the country depends on liquefied natural gas (LNG) bought from the Middle East for use as a fuel for power generation.
Like crude oil, LNG is transported through the Strait of Hormuz. A supply disruption in the strait would likely lead to higher prices.
Authorities still have time to decide the power tariff for September to December 2025, with a change in LNG prices expected to be a major factor.
The power tariff declined after soaring to 4.68 baht a unit in May 2023. The rate continued to fall to 4.15 baht a unit last year, and stayed at that level until the end of April 2025.
If Israel and Iran do not breach the ceasefire agreement and LNG prices in the spot market remain stable, the Energy Regulatory Commission, which regulates the power tariff, can determine a rate that will not add a financial burden to households and businesses, said an energy official who requested anonymity.
A portion of power bills are expected to reimburse the Electricity Generating Authority of Thailand and PTT Plc for previous subsidies they provided to control electricity prices in Thailand.
"But if the Strait of Hormuz is closed, the only question is how high LNG prices will be," said the official.
"Waiting for the Israel-Iran dispute to completely end doesn't accomplish much. Thailand needs measures for better LNG supply management."
Mr Pirapan said the Energy Ministry asked the Electricity Generating Authority of Thailand to buy cheaper LNG to increase its stockpile.
National oil and gas conglomerate PTT recently signed a 20-year purchase contract to buy 2 million tonnes of LNG from Alaska.
It takes 10-15 days to transport LNG from Alaska to Thailand, compared with 25-30 days to ship LNG from the Middle East to the country, according to a ministry estimate.
Thailand's power tariff is higher than in some regional countries, including Vietnam, which may be better placed to attract foreign investment, said Mr Kriengkrai of the FTI earlier.
Power rates may affect the government's attempts to encourage foreign firms to invest in Thailand as entrepreneurs may opt for countries such as Vietnam that offer cheaper prices, in addition to several free trade agreements, he said.
Higher power bills could force local manufacturers to raise product prices, reducing their competitiveness against sellers that export low-cost products, said Mr Kriengkrai.