A balancing act: Government takes action on rising domestic demand for fuel

With oil and gas imports weighing on its trade balance, Indonesia is taking steps to reduce domestic demand for fuel and boost local refinery capacity. These moves come in the wake of the International Energy Agency (IEA) releasing a 2013 report projecting that energy demand in the South-east Asian country is set to nearly double over the next two decades.

Improving The Trade balance

Imports of oil and gas from January to August 2013 amounted to $29.9bn, while exports stood at $21.4bn, according to data issued by the Statistics Indonesia in early October 2013. This $8.3bn gap more than accounted for the eight-month trade deficit of $5.5bn, a bill that could become even more expensive if the rupiah continues to lose ground against the dollar. Imports are also trending up, rising by 8.7% year-on-year, while export earnings dropped by 17.3%. Looking to reduce its foreign purchases of hydrocarbons, the government has implemented measures to reduce domestic consumption of fuel. These include a regulation issued in August that raises the amount of palm oil blended into biodiesel, from 7.5% to 10%, a move that the deputy energy minister, Susilo Siswoutomo, said was designed to cut spending on oil imports. The rate will be even higher for biodiesel used by power plants, where the mandatory level of palm oil has been increased to 20%. Perhaps more importantly, the government has reduced subsidies on fuel, in an attempt to pull back demand. The new prices went into effect in June 2013, with the cost of petrol rising by 44% and diesel up by 22%. Indonesia still has some of the lowest prices in the world, however, at Rp6500 ($0.65) per litre for premium fuel and Rp5500 ($0.55) for diesel. The reduction will nonetheless lighten the burden on the state budget, with subsidies estimated to cost about $20bn a year. These funds could be used to invest in increasing local refinery capacity, which stands at around 1m barrels per day (bpd), less than the current demand of 1.4m bpd. This would reduce reliance on imported refined petroleum products, which account for around half of foreign oil purchases in value terms. The expectation is that the cost savings to be achieved from the reduction in refined imports would more than offset the loss in revenues from foregone crude oil sales. However, realising this plan would likely require the redrafting of long-term export deals with countries such as Japan and Korea, an option that the former trade minister, Gita Wirjawan, has said that Indonesia is studying.

Thirst For Energy To Grow

Even if Indonesia were to re-negotiate these contracts, the additional oil would be unlikely to meet domestic needs. According to BP’s “Statistical Review of World Energy 2013”, crude production is off around 30% from its 2001 levels, while local demand has been steadily increasing over the last decade, in parallel with economic growth. Moreover, continued expansion means that this imbalance will likely worsen. The IEA’s “Southeast Asia Energy Outlook” report, published in late 2012, says annual energy demand will nearly double over the next two decades, jumping from 190m tonnes oil equivalent (toe) in 2011 to 360m toe by 2035, with oil expected to account for around 95m toe.

Demand for oil and gas from both the industrial and transport sectors is projected to rise steadily over the next 22 years, with the IEA saying industrial usage will climb faster than any other end-use sector. The biggest increase in demand in the transport sector will come as a result of higher private vehicle ownership, which is set to more than double to approximately 20m by 2035, up from roughly 9m in 2011.

While the increase in fuel prices means people may delay their car purchases or perhaps choose to drive less, it is clear that Indonesia is facing an increasingly challenging situation in terms of meeting its growing energy needs. With no obvious indication that oil production levels will increase anytime soon, it seems that the government is choosing the next best alternative, taking steps to reduce domestic demand.