SOARING oil prices have dealt Thailand's economy major blows in 2005, but the country is moving fast to ramp up production of an alternative fuel thanks to its large output of crops, such as sugar.
While most countries have few options but to pay up when it comes to soaring oil prices, Thailand is fast developing gasohol, a blend of gasoline and plant-based ethanol.
The alternative won't erase the country's huge oil import bill -- estimated at 10 per cent of gross domestic product (GDP) this year -- but the government hopes it will reduce it.
Thailand is the world's top producer and exporter of tapioca, derived from cassava, and its second-biggest sugar exporter, two crops in demand for the production of ethanol.
"Rising oil prices have pushed Thailand, like other countries across the region, to look to gasohol as a possible alternative," said Poramet Tongbua, energy analyst at TISCO Securities.
"It's a worldwide trend to try to boost alternative fuel consumption."
Thailand is looking to follow in the steps of countries such as Brazil, the world's biggest sugar producer, where two out of every five litres of fuel sold is gasohol.
Although oil prices have moderated to under $60 a barrel, fuel costs have doubled over the past two years, resulting in a list of economic ailments for Thailand.
Inflation is at a seven-year high, the current account is running deeply in deficit after years of surpluses, and the economy is expected to grow in 2005 at its slowest rate in four years.
The country is highly sensitive to oil imports. At 10 per cent of GDP, they are up from the previous peak in 1980 of 8.0 per cent of GDP, and are four to five times the oil import bills of developed economies, Phatra Securities estimates.
Analysts say the economic pain could continue next year as inflation continues to creep up, requiring higher interest rates, a combination that could squeeze consumers.
Since the government scrapped fuel subsidies in July to ease the burden on its finances, drivers have taken up the call to use alternative fuels, pushing down annual demand for 95-octane gasoline by an average of 28 per cent.
The government has also offered a tax waiver that makes the gasohol 6.0 per cent cheaper than regular fuel to promote its use, although there is a catch, says Noy, a 33-year-old trader at a foreign financial firm.
"It doesn't hurt the car, it helps the environment," he said. "But there's a reason you get a discount. It's because you get less mileage."
Gasohol consumption has jumped nine-fold since January to 3.0 million litres a day and government officials expect that to rise to 4.0 million litres a day next year.
Production of ethanol is expected to rise next year to 750,000 litres a day, still short of estimated demand of 2.0 million litres a day, indicating room for the industry to grow.
Current consumption of gasohol is more than a quarter of all premium fuel consumption, the government says.
Ultimately, the government wants to substitute 20-30 per cent of diesel and gasoline consumption with alternative fuels, saving billions of dollars in fuel costs a year, said Supavud Saicheua, head of research at Phatra Securities.
"Since imports are 'leakages' from GDP, a US$1.0 billion cut in oil imports would add at least US$1.0 billion to GDP," he said.
Fuel demand has already raised cassava prices and some sugar producers are looking to diversify away from the food chain.
Khon Kaen Sugar Industry PCL, Thailand's fifth-biggest sugar producer by market share, will start operating its own ethanol plant next month, joining the likes of Thai Agro Energy, 75 per cent-owned by Lanna Resources.
Using molasses, Khon Kaen Sugar hopes to produce 150,000 litres of ethanol a day, netting additional profits of around 70 million baht a year, Chalush Chinthammit, the company's assistant vice-president, said.
"Sugar is our cash cow business, but we are attempting vertical expansion into ethanol for growth," he said. Oil firms such as Thai Oil PCL and Bangchak Petroleum PCL are providing gasohol at their pumps or have plans to supply ethanol to the market.
But the changes are putting a strain on crop production, raising doubts about whether Thai farmers will be able to meet demand given existing export commitments.
"In the short term, there are concerns about supplies of the raw materials used to make ethanol being too little to meet the growing demand," said Tisco's Poramet.