The Fuse

Questions Over Subsidies Loom as Indonesia Rejoins OPEC

by Mehrun Etebari | October 22, 2015

As Indonesia prepares to be readmitted into OPEC at the upcoming December meeting in Vienna, it faces complex energy policy decisions, particularly in regards to fuel subsidies.

As Indonesia prepares to be readmitted into OPEC at the upcoming December meeting in Vienna, it faces complex energy policy decisions, particularly in regards to fuel subsidies. Attempts to improve the nation’s fiscal condition while decreasing excess energy consumption by cutting subsidies are promising signs, but news about heavy spending by state oil firm Pertamina and a recent move to cut diesel prices raise questions about the country’s determination to increase fuel efficiency as it seeks to reinvigorate its oil production.

The subsidy reform championed by President Joko Widodo is an ongoing contentious issue. It will be difficult to actualize and even more difficult to expand upon, as explored in the October update of the Oil Security Index released by Securing America’s Future Energy (SAFE) this week, which spotlights Indonesia’s energy challenges. Jokowi, as he is popularly known, made subsidy reform a central part of his electoral plan to improve Indonesia’s competitiveness, and the elimination of gasoline subsidies in January 2015 was projected to cut $16 billion from the national budget. However, a history of energy protectionism in the country has meant that progress in reforming subsidies will be hard to maintain. Proposed legislation in parliament that aims to limit foreign involvement in the upstream sector to capital and technology investments, essentially nationalizing the exploration and development of oil and new fields, is evidence of the continued resistance to liberalizing the oil industry.

Dissent against subsidy reforms is strong

Any change in subsidies runs the risk of stoking popular dissent, and the government is well aware of this, thanks to Indonesia’s recent history.

Any change in subsidies runs the risk of stoking popular dissent, and Jokowi’s government is well aware of this, thanks to Indonesia’s recent history. Previous incremental hikes in fuel prices under President Susilo Bambang Yudhoyono prompted rancorous street protests in 2005, 2008, 2012, and 2013. And the massive popular movement that brought down the 32-year dictatorship of Suharto in 1998 was in part motivated by plans to cut energy subsidies. Against this backdrop, facing the lowest economic growth rate in six years—largely the result of lower demand for Indonesian goods from China, according the Wall Street Journal—the government this month cut energy prices further.

These price cuts are aimed primarily at helping industries that are big users of energy. Natural gas prices for companies are being slashed, while state-owned electricity provider PT Perusahaan Listrik Negara (PLN) will cut nighttime industrial power rates by 30 percent. In addition, to ease the burden on freight and the mining industry, diesel prices were cut by 3 percent. The moves are likely to increase energy consumption while eating into the fiscal balance of the central government.

Is the government backtracking?

For now, there is no official sign of reversing January’s gasoline subsidy removal, but last month news surfaced that the liberalization of gasoline prices has not been carried out as swiftly as planned, raising concerns that the government is indeed backtracking.

For now, there is no official sign of reversing January’s gasoline subsidy removal, but last month news surfaced that the liberalization of gasoline prices has not been carried out as swiftly as planned, raising concerns that the government is indeed backtracking. As reported by Dow Jones Business News last month, state oil and gas company Pertamina has lost over $1 billion this year in its fuel distribution business. These losses are the result of keeping the pump price of gasoline below market value, a decision Pertamina says has been mandated by the government in spite of the subsidy removal plan. “The price of premium should already be above 7,400 rupiah per liter [equivalent to $2.02 per gallon], but because the government hasn’t yet made an increase, all the costs are borne by Pertamina,” company spokeswoman Wianda Pusponegoro told reporters. Economists suggest that Pertamina has kept fuel prices below market prices at the insistence of the government, which is funding the difference from its own cash reserves and resulting in massive losses.

The nation has gone from being a net oil exporter to a net importer, making the decision to rejoin OPEC all the more noteworthy.

The current economic concerns in Indonesia only bring more doubts that a full price adjustment to match the market is imminent. While short-term stability is undoubtedly a top priority for the Jokowi administration, continued progress on subsidy reform is essential for improving Indonesia’s long-term energy security and fiscal health. As noted in SAFE’s Oil Security Index Update, Indonesia ranks 12th of the 16 Index nations on net oil spending as a percentage of GDP, and its fuel consumption per capita has increased by 22 percent since 2000. Over that time period, the nation has gone from being a net oil exporter to a net importer, making the decision to rejoin OPEC all the more noteworthy as the nation tries to narrow the gap between its production and consumption.

Indonesia

Meanwhile, Indonesia continues to make plans to improve the efficiency of its energy sector. It has secured $5 billion in loans from the Asian Development Bank for PLN to improve power transmission and support clean energy initiatives, supplemented by $1.3 billion in potential European, American, and Qatari investment for power plants, most of which is earmarked for renewable energy. While these are positive steps, such a reorientation to renewable energy production will take many years; a concerted effort toward removing subsidies will bring down the nation’s public and private oil spending total while curbing inefficient consumption, with immediate effects.

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