When Indonesian president Susilo Bambang Yudhoyono was forced to raise fuel prices by more than 30% in mid-2008 in response to the global oil market soaring to a record $140 a barrel, he was clearly worried that the unpopular move would threaten his re-election chances.
But as the world price eased off later that year, he returned prices to their previous lower level in three incremental steps – a move he later credited for his resounding re-election win in July 2009, despite the commanding lead he had built over rival Megawati Sukarnoputri.
A decade later, with Indonesia still reluctant to link domestic fuel to global market prices, President Joko Widodo has adopted the same, limited tactic ahead of this April’s presidential election, though this time with Brent crude sitting at $64 a barrel and looking a lot more stable than in 2008-2009.
State-owned oil company Pertamina announced on February 10 that it would lower prices of non-subsidized gasoline by up to 800 rupiah (6 US cents) a liter, in line with a drop in the global price and a marginal strengthening of the rupiah against the US dollar.
Under the new policy, the price of Pertamex Plus was set at 11,200 rupiah (79 cents) and Pertamex 92 at 9,850 rupiah (69 cents), down from 12,00 rupiah and 10,200 rupiah respectively, while Pertalite 90 – which has largely replaced low-octane Premium as the cheap fuel of choice — remains at its existing level of 7,650 rupiah (54 cents).
Prices for different octanes of diesel were marginally reduced to between 11,700 rupiah and 10,200 rupiah a liter, and the charge for subsidized Premium was cut from 6,550 rupiah to 6,450 rupiah – but only on Java and the neighboring eastern islands of Madura and Bali.
According to GlobalPetrolPrices.com, Indonesia currently sits in 40th place among 164 countries on a list where fuel prices range from the cheapest (Venezuela, Sudan, Iran and Kuwait) to the most expensive (Zimbabwe, Hong Kong, Monaco and Norway).
That is based on an average price of 10,510 rupiah (74 cents) a liter, much lower than the global average of $1.09, and well below that of Singapore (1.51 cents), Laos ($1.16), Thailand ($1.04), the Philippines (94 cents) and Cambodia (91 cents). Only Malaysia, Myanmar and Brunei are cheaper in Southeast Asia.
Soon after he was elected in 2014, Widodo won widespread acclaim by going ahead with a promise to increase fuel prices by more than 30% in an effort to cut $8 billion from the country’s annual $23 billion fuel subsidy bill — something the outgoing Yudhoyono had refused to do.
But last year the government changed tack, increasing energy subsidies by nearly 70% – from 94.5 trillion ($6.7 billion) to 163.5 trillion rupiah ($11.5 billion) – and introducing new measures to regulate the prices of non-subsidized fuel due to inflation concerns.
That hasn’t been the only electoral inducement. Indonesia’s 2019 budget sets aside 381 trillion rupiah ($26 billion) in social spending, a 32% increase over 2018, mostly to be spent on the government’s so-called Family Hope, National Health and Small Business Credit programs to support the country’s poorest households.
It will also widen the number of households eligible to receive assistance from the Non-Cash Food Assistance program from 10 million to 15.6 million households in a further effort to reduce the official poverty rate from the current 9.8%.
Most analysts believe fuel prices will return to their old levels after April’s presidential and legislative elections, but in the meantime the burden will fall once again on Pertamina, which has already had to shoulder the extra costs associated with the same-price policy introduced across the country in 2017.
Previously, customers in Papua and other eastern Indonesian islands, in particular, had to pay significantly more for their fuel than anywhere else in the archipelago because of the high transport costs Pertamina must now absorb.
“Oil prices may be down from their highs in October ($81.03 a barrel), but now is the time to keep prices firm and help restore Pertamina’s finances, especially the costly one-price policy,” says one oil analyst. “They may make money at current prices, but I suspect that doesn’t cover the one-price costs.”
Moreover, Pertamina has also been saddled with the government’s policy of taking over the country’s expiring oil and gas concessions, a nationalist program that has already seen a 34% drop in production at East Kalimantan’s Mahakam block, the country’s second largest gas-field.
Analysts say while energy nationalism is understandable, leaving Pertamina as the sole owner and operator makes little sense when there is a need for efficiency, cost effectiveness and a high degree of technological skill and capital investment to maintain declining fields.
“The extra costs may not show up on the national budget now, but if Pertamina needs to be rescued, then it most certainly will,” notes a former senior official. ”The ratings agencies are already beginning to take notice and this could lead to a (credit rating) downgrade.”
Moody’s said last October that while Pertamina was well-positioned to cope with a rise in capital spending and execution risk, Indonesia needed major investments — presumably from foreign oil firms — to prevent a fall in overall oil and gas production.
Earlier this year, Pertamina revealed it was cutting its 2019 spending target by about a quarter, to between $4.2 billion and $4.5 billion, after the new upstream acquisitions and its costly integration with state gas company PGN in late 2018.
It also said it was targeting a profit of $1.5 billion to $2 billion in 2019, below last year’s projected $2.3 billion; the company’s overall financial performance for 2018 has not yet been disclosed, but its first half profit of $384 million was the lowest in four years.
Widodo signed off on a shock October 11 fuel price increase during the International Monetary Fund-World Bank conference held in Bali last October, then scrapped it an hour after it was announced when told the impact it would have on the purchasing power of low-income Indonesians.
With the world price climbing towards $80, the average 7% price increase for Premium and diesel had in fact been decided the previous month, along with a hike in high-octane Pertamax used by wealthier car owners which remained in force until this month.
Wall Street analysts expect the world oil price to stay in the $68-73 range through 2019, lower than the $75 assumption in Indonesia’s 2019 budget, which was a lot more realistic than usual. But the same analysts say a number of economic and geopolitical risks, including the US-China trade dispute, could still cause price spikes.
After peaking at 1.7 million barrels in the mid-1990s, Indonesia finally became a net oil importer in 2009 and now has an oil and gas deficit of $12.4 billion, by far the single biggest contributor to the country’s troubling 8.5% trade deficit last year.
Although there was no public clamor for a drop in fuel prices, Indonesians generally regard subsidies as their right, even if global conditions sometimes mean price fluctuations. For their part, successive governments have come to see the subsidies not as a financial burden, but as a social obligation.
Under those circumstances, reducing prices becomes almost irrelevant – as does any effort to cut traffic congestion. “If you keep prices low, people will have no interest in conservation,” says one former government official who worked on economic issues. “And it doesn’t educate them about living in the real world.”