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 $125-135 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)

The VAR model in this paper has followed the studies in Chang et al (2011) and Kilian (2008).

The basic set up of the model as follows:-

𝑦𝑡 = 𝐵𝑖

𝑝

𝑖=1

𝑦𝑡−𝑖 + 𝑢𝑡

where

y is an n-vector of endogenous variables.

𝐵𝑖 is a 𝑛 𝑥 𝑛 matrix of regression coefficients to be estimated.

𝑢𝑡 is an error term.

p is selection of the appropriate lag length.

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)

In order to distinguish between these three macroeconomic variables (household saving, disposable income and

trade balances):

the structural VAR model of the oil markets is estimated using yearly data from 1992 to 2015.

The included variables are: ∆𝑝𝑟𝑜𝑑𝑡 , the percentage change in world crude oil production;

𝑟𝑒𝑎𝑡 , which denotes an index of real economic activity that affects government fossil fuel subsidisation;

𝑟𝑝𝑜𝑡 , which represents the actual price of oil. The VAR is estimated using yearly data, with three lags.

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

Table 1 Indonesia Johansen tests for cointegration

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.