Plummeting oil prices: Does it matter for tax subsidies reform in Asia-Pacific countries?

Outline  Research objective  Research problem  Literature review  Research methodology  Research findings  Conclusions

Objectives  Addresses some policy issues around energy prices that relate to policy decisions making.  Discusses the responsiveness of consumer behaviour and aggregate welfare as a result of elimination of fuel subsidies.

Research problems  How do these subsidies affect consumer behaviour and aggregate social welfare as a result of elimination fuel subsidies?  Why the government in the Asia-Pacific region still favour this policy even though it introduces inequity and inefficiency?

Literature review (1)  World crude oil prices have been exceedingly volatile during the last decade.  Brent crude oil prices have dropped significantly, more than 50 percent over the past year.  Global investment, particularly in the oil and energy sector, has been hit hard by the extreme level of record oil prices. The seven major internationally well-known oil companies such as Royal Dutch Shell, BP, Exxon Mobil, Chevron, Total, ENI and Statoil have agreed that a crude oil price should maintain at least $ per barrel to be profitable (Salameh, 2015).

Literature review (2)  Fuel subsidisation has a long history in the emerging Asia-Pacific economies.  The purpose of governments in these countries subsidise fuel prices is to help improve living conditions of the poor.  Figure 1 presents fossil fuel subsidies in south-east Asian countries. Figure 1: Economic value of fossil fuel subsidies in south-east Asia-Pacific countries Source: IEA, 2013

Literature review (3) There are substantial studies that recognise that fuel subsidies are not sustainable and are having many unintended consequences (e.g. Coady et.al. 2015; Foo, 2015; Anand et.al. 2013; Cottarelli, Sayeh & Ahmed, 2013; Jha, Quising & Camingue, 2009).  Aggravate fiscal imbalances  Crowd-out priority public spending  Depress private investment  Distorts resource allocation  Creates artificially capital-intensive industries

Methodology (1)

Methodology (2)  Application of the VAR model uses three variables in three Asia-Pacific oil exporting countries to develop a research.  These three countries are Asia-Pacific Economic Cooperation (APEC) member countries, namely Indonesia, Malaysia and Papua New Guinea.  Three variables used to estimate the impact of fuel subsidisation are household savings, consumer disposable income and trade balances.

Methodology (3)

Data The data used in this study is obtained from various sources.  IEA and BP are the primary sources for obtaining the world crude oil prices.  Specific government sources and websites such as APEC website, the Malaysia Department of Statistics, Indonesia Department of Statistics and the Bureau of Statistics Papua New Guinea were used for the country-specific time-series.  The World Bank Databank  IMF world economic outlook databases

The empirical analysis (1) The research has conducted two analyses in this study.  The first analysis is the Johansen cointegration test  The second is the VAR model.  Table 1 shows the Johansen test for cointegration for one of the countries in this study - Indonesia

The empirical analysis (2)  In the second analysis, the researcher has conducted a VAR model for investigating macroeconomic performances in relation to fuel subsidisation in Asia-Pacific countries.  Table 2 shows one of the VAR analysis in the Asia-Pacific countries.  gross domestic saving, gross domestic income and trade balance – with three lags to conduct a study.

Table 2 Indonesia VAR analysis

Findings Findings of this study indicate that:-  There is no significance among macroeconomic variable performances.  Fuel subsidy except gross domestic income, which shows some impacts against the government fuel subsidisation scheme. In general, the outcome in this study indicates that domestic savings indeed have declined as a result of removing the fuel subsidies scheme. Abolishing this scheme can indeed impact the low- income earners in these countries.  This study shows similarity to the empirical study conducted by Chang et al (2011).

Conclusions The government handouts can distort local economic activities. However, this study shows that there is no short- run causality among these variables about government fuel subsidisation scheme. The unwillingness for some states to remove this system because:  The energy sector is the major source of income.  Companies in the resource and energy sectors are also major sponsors of business and government activities.  There are a corporate welfare and cosy relationship between the government and resource companies which closely link to the energy subsidies scheme.