Inflation forecast pressured by $100 oil

SOARING CRUDE

Inflation forecast pressured by $100 oil

3-4% target comes under early threat

Published on January 4, 2008

Authorities hope oil prices do not stay above the US$100 (Bt3,360) mark for too long, otherwise inflation will push beyond the predicted level of 3-4 per cent this year.

Finance Ministry spokesman Somchai Sajjapongse said yesterday that the ministry had pinned inflation at 4 per cent this year, based on crude oil at $83 a barrel.

"Inflation could be extremely high if oil rose to $120 a barrel. However, I don't think it would stay at that level for a long period as the high price would encourage more supplies, while alternative fuels would also help.

"Still, if it stays at the level for a long period, it would be horrible," he said.

Yangyong Phuangrach, director-general of the Internal Trade Department, said the Commerce Ministry's inflation target of 3.0-3.5 per cent for this year was based on the Dubai crude price of $80-$85 a barrel.

"If the oil price soars to $120 a barrel in the next six months as anticipated by Opec [Organisation of Petroleum Exporting Countries], this is beyond our expectation," he said.

Under that scenario, the ministry will closely monitor product prices to cushion the blow on consumers. It would look into cost-control measures at factories as well as the retail prices of goods. But what concerns him most are food prices, especially for vegetable oil, which are heading higher.

Light, sweet crude for February delivery rose $4.02 to $100 a barrel on Wednesday in New York before slipping back to settle at a record close of $99.62, up $3.64. In Singapore, it fell 31 cents to $99.31 a barrel in Asian electronic trading. The Dubai crude price ended at $89.38.

Traders in Singapore were waiting for the release of a weekly US petroleum supply snapshot later yesterday, and some expected crude futures to break through the $100-a-barrel level if the government reported crude inventories falling by more than expected, analysts said.

PTT president Prasert Bunsumpun said global oil prices were trending upward and putting pressure on domestic prices. Though domestic prices were jacked up yesterday, the marketing margin is still only 50 satang per litre.

"Next week a discussion will be held by oil retailers on the possibility of raising pump prices again," he said.

Companies have been forced to come up with measures to fight higher oil costs.

Pisit Ohmpornnu-wat, president of CP Merchandising, said his company had shortened its order-taking time from six months in advance to two to three months. The strategy is aimed at reducing business risks from many factors, mainly energy and raw-material prices.

The company has adjusted prices up by 30 per cent since last year to offset rising costs of both fuel and raw materials, he said.

"We have explained to customers that we have to shoulder rising costs and they accepted that," he added.

Paiboon Ponsuwanna, chairman of the Food Processing Industry Club of the Federation of Thai Industries, said oil at more than $100 per barrel would ravage the fishery and food-processing industries.

Fishermen would not bother going out because high fuel costs and low fish stocks would lead them to suffer losses.

"Costs of production have increased tremendously, so manufacturers have to hike prices, despite consumer discontent," said Paiboon, who is also the executive director of Transamut Foods.

However, oil is not the only evil. Other factors, including mounting labour costs and fluctuating exchange rates, are also eroding the confidence of manufacturers and consumers, he said.

This quarter will see a surge in retail prices, as many makers can no longer endure rising costs of production, he added. However, manufacturers will not make too much of a change out of fear of losing market share.

Inflation last month was a historic high of 3.2 per cent due to high oil prices.

Energy Minister Piyasvasti Amranand urged the new government not to reduce retail oil prices to mitigate the impacts, as it would pose a long-term burden. Instead, it should focus on alternative fuels like gasohol E10 and E20, which could substitute for 10-20 per cent of oil imports.

The Energy Ministry is considering imposing the measures on E85 and, from discussions with auto companies, vehicles compatible with the new fuel could be marketed within three to four years depending on tax incentives, he said.

Oil demand in the surging economies of China and India have sent prices soaring over the past year, and tensions in oil-producing nations like Nigeria and Iran have made investors increasingly nervous and invited speculators to drive prices higher.

Violence in Nigeria helped give crude the final push to $100. On Tuesday, bands of armed men invaded Port Harcourt, the centre of Nigeria's oil industry, attacking two police stations and raiding the lobby of a major hotel.

"My view is that the market will breach $100 a barrel. But later on in the first quarter, pricing is bound to ease back below $100 because closer to spring, demand for oil in the world typically cools down," Victor Shum, an energy analyst with Purvin and Gertz in Singapore, told Associated Press.

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