The price is right: Subsidies for petrol have been costly, but removing them presents new challenges

With a population of some 240m citizens, Indonesia has long been burdened by the conundrum of providing relatively inexpensive energy to its population at large while at the same time maintaining domestic purchase prices of oil and gas high enough as to remain attractive for upstream operators to continue to search out and exploit domestic reserves. Caught in the middle of these diverging price points is the state, which has been facing an increasingly steep tab for the country’s energy use in recent years.

This combination of policies and growth are putting the country on pace to become the world’s top importer of motor fuel by 2018, according to a study released in September 2013 by the consulting firm Wood Mackenzie. The report estimates that the petrol shortfall will rise from 2012 levels of 340,000 barrels per day (bpd) to approximately 420,000 bpd by 2018, while the combined US-Mexico market will see imports drop from 560,000 bpd to 60,000 bpd over the same time period on the strength of increased domestic production and refining capacity.

Footing The Bill

The government’s annual fuel subsidisation tab increased more than four-fold from 2009 to 2012, from Rp45trn ($4.5bn) to Rp211.9trn ($21.2bn). For 2011 and 2012 these costs exceeded projected costs laid out in the annual state budget (APBN-P), with 2011 subsidies totalling Rp165.2trn ($16.5bn) compared to estimates of Rp129.7trn ($12.9bn), and a larger gap in 2012 between the APBN-P figure of Rp137.4trn ($13.7bn) and actual costs of Rp211.9trn ($21.2bn). Projected costs for 2013 are set at Rp199.9trn ($20bn), with first semester costs at Rp98.2trn ($9.8bn), while the 2014 APBNP targets a reduction of subsidies to Rp194.9tn ($19.5bn). If the country is to meet these targets, it will need to carry out politically difficult decisions to reduce subsidies in the face of rising energy prices. This situation is compounded by additional macroeconomic challenges that Indonesia is facing and which picked up speed in the summer of 2013. Inflationary pressure as a result of fuel price hikes can exasperate an already escalating problem. When the government last increased fuel prices in 2008 and the price of petrol was raised from Rp4500 ($0.45) per litre to Rp6000 ($0.60) per litre (although prices were reduced again starting in 2009), inflation spiked from 6.6% in 2007 to 11.1% in 2008 according to central bank statistics. Fuel price hikes in 2005 also contributed to a similar hike in inflation of 17.1% for the year. While this loss-making position was tenable, when the economy was riding a wave of strong GDP growth, the expense has been increasingly difficult to absorb with the economic downturn and rising trade gap, which exploded in mid-2013. The price paid by the government could increase more if the value of the rupiah continues to decline relative to the dollar. With the Indonesian rupiah valued at 12,153:1 US dollar (as it was in late December 2013) instead of the 9750:1 rate posted as late as May 2012 initially projected in the government’s budget, the country’s fuel subsidy bill could be 15% higher than projected according to estimates by the CEO forum, CastleAsia.

Slashing Subsidies

With the ballooning cost of energy on national budget ledgers, the government moved to slash petrol and diesel subsidies in June 2013, in spite of popular dissent. The price hike was similar to a 2008 move, as the price of subsidised premium fuel increased 44% from Rp4400 ($0.44) per litre to Rp6500 ($0.65) per litre, while the price of diesel was hiked from Rp4500 ($0.45) per litre to Rp5500 ($0.55) per litre. Natural gas prices have also been on the move, in spite of strong pressure from the industrial and power sectors to keep prices low and attractive for industrial and residential use.

The unit price of natural gas paid by the country’s largest electricity provider, state-owned PLN, increased from Rp39,867.31 ($4) per thousand standard cu ft (mscf) to Rp63,757.56 ($6.38) from 2011 to 2012, and has continued rising steadily, from Rp23,480.99 ($2.35) per mscf in 2007, according to PLN reports.