Do fuel subsidies have a place in our future?

A service station worker tidies up the gas hoses at a petrol station in Jakarta on 30 May, 2012. (Oscar Siagian / AFP Photo)

Fuel subsidies have always played a significant role in Southeast Asia – most notably in – Brunei Darussalam, Indonesia, Malaysia, Myanmar, Thailand and Vietnam. While Southeast Asia’s economy may be expanding rapidly, most of the countries there have yet to achieve the status of a high-income nation. With oil prices constantly fluctuating, fuel subsidies are seen as a vital policy that helps the citizens of these countries cope with the high cost of living.

Oil demand in Southeast Asia

While Southeast Asia used to be a hub for oil exports, most oil producing countries in the region have transitioned to becoming oil importers instead of exporters. It is forecasted that oil production will drop by 30% by 2040. This is brought about by a number of reasons including dwindling reserves and the lack of discovery of new oil fields.

Despite the drop in oil production, demand for oil in the region is expected to grow. According to the International Energy Agency (IEA) Southeast Asia Energy Outlook 2017, oil demand in the region is expected to increase from 4.7 million barrels per day to around 6.6 million barrels per day in 2040. As energy demand is expected to increase while oil production in the region drops, oil imports in Southeast Asia is expected to soar two-fold.

The reason behind the increase in oil demand is largely due to the region’s booming transportation sector – particularly its automotive industry. With the region growing in terms of wealth, car ownership rates will see a spike in the coming years. Last year, aggregate new car sales in Singapore, Indonesia, Malaysia, Thailand, Vietnam and the Philippines rose five percent to nearly 3.4 million units sold. Aside from that, it is estimated that vehicle ownership across the region is expected to grow more than 40% by 2040. Meanwhile, motorcycles will remain as a popular mode of transportation for Southeast Asians, as the region has become synonymous with images of traffic dominated by the ubiquitous two-wheeler.

Source: International Energy Agency: Southeast Asia Energy Outlook 2017

The importance of fuel subsidies

As the region still lags behind other developed countries in terms of public transportation, having a car is a necessity – and as such, fuel subsidies play a vital role in the daily lives of the citizens that live in countries with subsidies. Without fuel subsidies, the prices of fuel in countries such as Malaysia, Indonesia, Thailand and Vietnam would be determined by the international oil market, making them vulnerable to sudden price hikes.

Thailand recently announced that it will use its state oil fund to help consumers as global oil prices rise. According to the country’s energy minister, it will use money from the fund to absorb 50 percent of any increase in retail prices.

In Vietnam, a Petroleum Stabilisation Fund is used to reduce the price fluctuation stemming from changes in international oil prices.

Fuel subsidies have become an integral part of the region’s psyche, so much so that it becomes an issue that politicians exploit to gain political mileage. For example, in Malaysia, one of the major reasons why the Alliance of Hope (Pakatan Harapan) was elected into power was its promise of reintroducing fuel subsidies that former Prime Minister Najib Razak rolled back on.

The problem with subsidies

Analysts often criticise fuel subsidies as incentives for citizens to buy cars or consume fuel unnecessarily. Furthermore, the money spent on subsidising fuel can be used to fund other infrastructure projects instead. Also, fuel subsidies have shown to be a burden on the country’s financial accounts.

As of late, governments are beginning to realise that providing fuel subsidies could strain the economy. According to the IEA, latest data shows that fossil fuel subsidies in Southeast Asia have cost the region US$17 billion. Because of such large expenditure on subsidies, countries like Malaysia, Thailand and Indonesia started reforming their subsidies policies around 2014.

The Indonesian government abolished subsidies for gasoline in 2015 and fixed subsidies in 2016. The reforms saved the government around US$8 billion which was then redirected to infrastructure development and social programmes. However, with oil prices going up again recently, there has been talk of fuel subsidies returning there.

Subsidies may keep citizens happy, but they do no good for the environment. Nor do we want a citizenry that is dependent on subsidies. Governments need to rethink the role of subsidies and focus their spending on programmes or infrastructure that could further benefit the people.