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JAKARTA - Fuel subsidies have long been a thorny problem for various Indonesian governments. Attempts to reduce the level of these subsidies by increasing domestic fuel prices have often been met by protests, forcing the price hike to be reversed. In January 2003, the government again tried to increase fuel prices, and was again forced to back down by public protests. In this article , Dr. Bachrawi Sanusi takes an indepth look at the issue:
In the 1970s, oil and gas became the backbone of Indonesian development. As an oil- and gas-exporting country, Indonesia’s revenues grew steadily as the volume and price of its hydrocarbon exports increased. This state of affairs was reversed in the 1980s, not only because oil prices were no longer surging, but also because of the growth in domestic oil demand. It is assumed that Indonesia will one day become a net oil-importing country as demand continues to rise.
This article discusses the basic problem of fuel subsidies and its implications. There is no easy solution to this, especially since the Indonesian government’s policy on fuel subsidies has not been consistent.
In mid 2001, amid increasingly uncertain economic and political conditions, the government unexpectedly announced a fuel price hike averaging around 30 per cent. Although the total cost of the fuel subsidy was initially assumed to be 41.6 trillion rupiahs, this swelled to some 66.8tr rupiahs as a result of the Indonesian currency’s decline against the US dollar and movements in world crude oil prices (including, of course, Indonesian crudes).
This 30 per cent fuel price increase was agreed with the International Monetary Fund (IMF). The government, its policy supported by its main financial backer, expressed the hope for immediate release of IMF funds. It was the government’s failure to implement proper economic and monetary policies that caused the weakening in the value of the rupiah, which in turn resulted in the rise in the cost of fuel subsidies.
Once again, the state was demanding sacrifices by low-income families, whose purchasing power had already decreased by 25 per cent in 2000. As an alternative, the government could have made drastic cuts in the state budget, particularly cutting various fictitious projects such as official trips, whose only purpose is to fill the pockets of government officials.
Additionally, low-priority projects ought to be rescheduled, and the focus should be on those of greater urgency. Some of the funds collected from the fuel price hike of June 2001 are used for social compensation programmes. These programmes include scholarships for children of low-income families, renovation of school buildings, free immunisation, clean water and sanitation projects.
It seems that the policy of cutting fuel subsidies through price increases and using some of the funds for social compensation programmes has so far only benefited a few people in the regions, who have received funds as a consequence of the national policy on regional autonomy.
Earlier, the Indonesian government had also increased fuel prices for industry, effective from April 1, 2000. The price hike was a two-tier one: a 50 per cent increase for general industry and other activities and a 100 per cent increase for general mining and oil and gas extraction, foreign ships, and to meet bunker demand for ships sailing to foreign destinations.
In other words, industries whose products were exported to collect foreign exchange, particularly the US dollar, did not deserve not to receive subsidies. In the past, the industrial sector has not only received fuel subsidies, but also electricity subsidies, credit facilities, and so on. Why should they have received subsidies that were genuinely needed by low-income families?
If domestic fuels continue to be subsidized, their price will be far lower than the price on international markets, particularly for gas oil. This has been and will remain a burden on the state oil and gas company, Pertamina, which has to distribute fuel all over the country at the same price.
The low domestic fuel prices have often been exploited by smugglers, who sell fuel abroad at prices far higher than they could get in Indonesia, while others use fuel intended for the common people for industrial needs.
Pertamina, which is often blamed for irregularities in distribution, must therefore improve the nationwide fuel distribution network, and learn the lessons of experience. The government must also take stern action against smugglers and those who break the law, so that such activities will not happen again in the future.
As a developing country which is aiming to develop its industrial sector, Indonesia faces constantly increasing energy demand. Fuel demand, especially for gas oil and premium gasoline, increases every year, but its price remains below the production cost. The result is that the government is always burdened with subsidies.

Oil product smuggling

Gas oil, which still gets a hefty subsidy from the government, causes particular problems, as the commodity is often smuggled abroad and the quota of the common people is often used by the industrial sector. This fuel smuggling means that the Indonesian people are not the only ones benefitting from the subsidies.
To make matters worse, some of the smuggled gas oil is re-exported to Indonesia, as the authorities have made no serious efforts to break up the smuggling network. Pertamina cannot be blamed for the smuggling, as it is the duty of the authorities to arrest those responsible. As
demand for diesel oil for transport and industry has increased significantly and local production capability cannot fulfil this need, Pertamina has been forced to import the fuel.
The impact of world crude oil price rises and the depreciation of the rupiah affects the price of gas oil, further burdening the government, which has to increase fuel subsidies. As an example, in August 2000, fuel demand reached some 1.9 million kilolitres, and Pertamina had to import 2.8m barrels or some 440,000 kilolitres for that month. The IMF is pressing the government to scrap fuel subsidies immediately, as it is feared that they will strengthen the competitiveness of Indonesian products in the global market. These subsidies cut the cost of manufacturing for Indonesian products. The industrialized nations fear that their products will not be able to compete with those from developing countries, and they are therefore pressing oil-producing and exporting countries to scrap fuel subsidies.
Perhaps one should reconsider the definition of ‘subsidy’ given by Eric L Kohler in his book: A Dictionary for Accountants; 'A subsidy is a grant of financial aid, usually by a government body to some person or institution for general purposes'. Whatever the case, it is clear that the government’s burden can only increase if fuel demand continues to rise (as is expected) and the value of the rupiah falls.

Domestic fuel demand

Since the Indonesian government’s first five-year development programme known as Repelita I, was launched in 1969-70, the demand for various fuels (including aviation fuel, gasoline, kerosene, diesel oil and fuel oil) has risen continuously. As an illustration, Table 1 shows the growth in domestic fuel demand from 1984-85 to 1998-99.
Sectors which are heavy energy users include households, power generation by the state-owned electricity company, PLN, non-PLN power generation, and the transportation and industrial sectors.
Demand for electric power is also increasing, but PLN has not been able to meet the needs of one of the largest power users, namely the industrial sector, and so the idea that the private sector must develop its own power plants has gained credibility. Unfortunately, there is still a heavy reliance on gas oil, although Pertamina’s production capacity is limited. This is one of the reasons for the prolonged problems. Although PLN is expected to expand its power production, the company must also think of its limited energy sources, particularly gas oil. PLN may instead turn to other energy sources like coal, geothermal power, natural gas, and so on.
Table 2 shows fuel use broken down by sector. The biggest user of fuels is the transportation sector, and thus it can be seen that any fuel price hike will badly affect people who use transportation services. Therefore, both the government and Pertamina must be careful before making any decision to increase fuel prices.
Total fuel demand in 1994-95 (as shown in Table 2) was put at 49.8m, which increased to 612 m by 1998-99. Since fuel demand is continuously increasing, the government must set out its priorities regarding which sectors will continue to be subsidized, and in which sectors the subsidy must be scrapped. Without fuel price hikes, the subsidy issue will become a problem that can only get more serious with time.


The problem of fuel subsidies is a difficult one. Various sectors have received fuel subsidies for a long time. The industrial sector needs subsidies to raise its international competitiveness. Low-income families need subsidies for domestic fuel purchases, especially kerosene. The transportation sector also needs subsidies to keep fares at levels affordable by low-income families.
However, all these subsidies have become a heavy burden on the state budget. The problem is made worse by the higher domestic fuel prices in neighbouring countries, which encourages fuel smuggling on a scale that the authorities have found it increasingly difficult to stop.
In all countries, fuel demand is seen increasing in the coming years. Although Indonesia is currently an oil-producing and exporting country, the nation already imports certain kinds of fuel, and must think ahead to the time when it will no longer be a net oil exporter.

Posted in General @ 15 July 2003 by Jeroen · 'Blog' RSS feed · permalink

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