Fuel price increase: Jokowi’s Government insensitive decision and liberal energy policies drive imports up

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(illustration: IO/Agung)

IO, Jakarta – On 1 July 2018, without any official announcements made, Government through PT Pertamina increased petroleum fuel prices. Per­tamax is being sold at Rp 9,500.00/ liter or increased by Rp 600.00; Per­tamax Turbo Rp 10,700.00/liter or increased by Rp 600.00, and Pertam­ina Dex Rp 10,500.00/liter or an in­crease of Rp 500.00. This is the 14th time Government Jokowi increased petroleum fuel prices throughout 2015-2018, even though world petro­leum fuel prices decreased 11 times throughout 2014-2016.

These 14 fuel price increases mark a new record for the Jokowi-JK Government. After all, if we view the rule of other presidents, we note that during Susilo Bambang Yud­hoyono Government only increased petroleum fuel prices 4 times in 10 years; President Soeharto increased petroleum fuel prices 3 times during his 30 years of rule; President Ab­durrahman Wahid increased petro­leum fuel prices twice; and President Megawati Soekarnoputri increased petroleum fuel prices 4 times. Presi­dent B. J. Habibie set his own special record: during his 18 months’ rule of Indonesia, he did not increase pe­troleum fuel prices at all. In fact, he reduced prices from Rp 1,200.00 to Rp 1,000.00/liter.

Increasing Imports
In order to satisfy domestic petro­leum fuel demand, Indonesia imports hundreds of thousands of oil barrels every day. The average petroleum fuel consumption is 1.6 million barrels/ day, while maximum production ac­cording to data from the Petroleum and Natural Gas Upstream Business Execution Special Task Force (Satu­an Kerja Khusus Pelaksana Kegiatan Usaha Hulu Migas – “SKK Migas”) is only 770,000 barrels/day. This is even lower than 2018 State Budget target at 800,000 barrels/day.

The imbalance between produc­tion and consumption renders Indo­nesia to be dependent heavily on oil imports. According to data from word­topexports.com, Indonesia imported USD 8.2 billion or equal to Rp 117.2 trillion worth of oil (with an exchange rate of Rp 14,300.00) throughout 2017. This value means Indonesia is the third largest crude oil importer in Southeast Asia after Singapore and Thailand.

Other than importing crude oil, Indonesia also continues to do large-scale imports of petroleum fuel be­cause of limited refinery capacity and the type of gasoline we consume. The latest data from the Indonesian Sta­tistics (Badan Pusat Statistik – “BPS”) shows that Indonesia imports 10 million tons in oil products in Jan­uary-May 2018. Meanwhile, the Pe­troleum and Natural Gas Upstream Regulatory Agency (Badan Pengatur Hilir Minyak and Gas Bumi – “BPH Migas”) predicts petroleum fuel con­sumption throughout 2018 will be 75 million kilo liter (KL). This amount comprises of several Specific Petro­leum Fuel Types (Jenis Bahan Bakar Minyak Tertentu – “JBT”): 16,2 mil­lion KL for diesel fuel and kerosene, and 51.3 million KL for Specially As­signed Petroleum Fuel Type (Jenis Bahan Bakar Khusus Penugasan – “JBKP”) and general petroleum fuel types (gasoline, Pertalite, Pertamax). Specific Petroleum Fuel Types are gasoline, diesel fuel, and kerosene. Specially Assigned Petroleum Fuel Type are gasoline with RON 88 or gasoline with special prices set by the Government. General petroleum fuel types are non-subsidized gaso­line of Octane 88 and higher. From this amount, PT Pertamina (Persero) manages about 79% of the total na­tional petroleum fuel. This comprises of 15.9 million KL for diesel fuel and kerosene, and 7.5 million KL of gas­oline just for areas outside of Java, Bali, and Madura.

According to BPS data, Indonesia imports oil from at least 9 countries: Saudi Arabia, Nigeria, Australia, An­gola, Azerbaijan, Singapore, Malaysia, South Korea, and Qatar. The import­ed oil includes both crude oil and oil products (petroleum fuels). Total crude oil imports are 8.01 million tons, with a CIF value of USD 4.03 billion or equal to Rp 57 trillion. Im­porting oil product (petroleum fuels) countries from January until May 2018 include Singapore (6.4 million tons), Malaysia (1.52 million tons), South Korea (0.925 million tons), Qa­tar (0.380 million tons), Saudi Arabia (0.395 million tons), and 0.580 mil­lion tons from other countries. Total oil product imports are higher than crude oil imports, i.e. at 10.2 million tons at a value of USD 6.7 billion or Rp 95 trillion. The State spends Rp 152 trillion just for importing these two oil types.

According to Kurtubi, an Oil Ex­pert, increased oil imports within the past few years is caused by the bad condition of national oil. Indonesia’s oil production or lifting is very low. 15-10 years ago, Indonesia still pro­duced about 1.5 million barrels/day, but the amount has been continuous­ly decreasing.

Exploring investments mostly fell since the enactment of Petroleum and Natural Gas (Minyak Bumi dan Gas – “Migas”) law No. 22 year 2001. This Law obstructs investors because it causes the system to be more convo­luted than before.

The system was previously sim­pler, because the State entrusted the management of national migas to the national oil company, Pertamina. Under Pertamina, investments and production increased gradually from about 300,000 barrels/ day to a peak of 1.6 mil­lion barrels/day about 15 years lalu. However, when the Migas Law was implemented, Pertamina no longer manages na­tional migas. The Govern­ment manages migas itself by establishing a non-corpo­rate Government agency (BP Mi­gas). This means that the system is convoluted because of bureaucracy. “People even need 100 permits just to perform drilling,” Kurtubi said.

Under Pertamina, no such permits were necessary. Pertamina went directly to deal with the people, i.e. governors, regents, or dis­trict heads, not the investors or contractors. This made things easier. The current system is just not right. After BP Migas was shut down by SBY’s government because the Constitution Court judges it to have violated the 1945 Constitution, the Government replaced the defunct BP Migas with SKK Migas. However, both of them are still Governmental agencies. Now SKK Migas manages things nationally in the same way as BP Migas: it obstructs investments because of the convoluted system.

The Migas Law obstructs investors and made them drop out, because Article 31 of the Law obliges investors to pay taxes even though they have not discovered oil yet, or they are still exploring. This bad system reduces i n v e s t ­ments. Migas L a w should o b l i g e Pertamina to construct oil refineries and satisfy national petro­leum fuel needs. As no such obli­gation is contained in the Migas Law, Pertamina does not feel the need to construct petroleum fuel refineries. There are plans to construct them now, but that seemed to be forced and might only be completed 5-6 years from now.

Oil production decreases while consumption increases, because the number of residents increases ev­ery year, causing massive growth in crude oil and petroleum fuel imports. “Especially since no new oil refiner­ies are constructed since 2001, as the Government prefers imports. We must note that,” Kurtubi insisted.

Migas Deficits
BPS data shows that migas defi­cit is a constant in Indonesia’s trade balance since 2013. In 2012, when world oil prices reached USD 100.00- USD 120.00/barrel, Indonesia’s mi­gas deficits reached USD 5.58 billion. Deficits increased in 2013. At the end of the year, migas deficits reached USD 12.6 billion. This caused Indo­nesian trade balance deficits of up to USD 4.07 billion. In 2014, deficits did not recover, and even skyrock­eted to USD 13.4 bil­lion. Luckily, Indonesia’s non-migas transactions were good, so that trade balance defi­cits could be kept down to USD 2.18 billion. This was supported by the decrease of world oil prices to nearly half at the USD 40.00-USD 50.00/ barrel range. Indonesia’s trade bal­ance ended up being saved from defi­cits and even had a surplus of USD 7.6 billion.

The Government enjoyed the fruits of this trade balance surplus at least until the end of last year, even though migas transaction deficits increased again unrealized, from USD 6 billion to USD 8.7 billion. The trigger for this is clearly the rising oil prices, i.e. slowly reaching up to USD 60/barrel. Indonesia’s trade balance in 2018 up to May fell again due to migas. World oil prices that continue to skyrocket, along with production missing from its target, caused migas transactions to endure deficits of up to USD 5.03 billion. In the non-migas transaction sector, there is only a surplus of USD 2.19 billion, far below migas deficits. Indonesia’s trade balance ended up with a deficit of USD 2.8 billion.

“There has been no significant im­provement until July. With extreme­ly high petroleum fuel consumption during the past Ramadan-Eid peri­od, we would still be unable to save Indonesia’s trade balance from defi­cits. Our migas balance deficits con­tinue to increase, proving how much we rely on imports,” said Bhima Yud­histira, Economist from the Institute for Development of Economics and Finance (INDEF). “This is the conse­quence we all must face from using the wrong energy policy, so that Per­tamina has no money for exploring for new oil wells. This causes our oil pro­duction to become weak, and causes us to be extremely dependent on im­ports,” he said.

Bhima further said that “Our en­ergy policy is chaotic. For example, gasoline supplies in Java, Madura, Bali might suddenly be decreased 50%. The Government said that it is for infrastructures, but on the other hand Pertamina is being forced to distribute petroleum fuel at a single price. Petroleum fuel subsidies used to be included in the State Budget, now it becomes Pertamina’s respon­sibility. Finally, Pertamina endures potential loss of up to Rp 18 trillion. This will obstruct their performance in seeking investments for new wells, which means that there will be scarce production within the next few years. Instead of just being a net importer, in the next 10 years we might fall to be­come totally an oil importer, meaning that 100% of our oil needs is supplied by imports. This is more than eco­nomic security, but national security, as we will be too dependent on other countries,” he said.

Kurtubi said that our primary problem is that domestic petroleum fuel production is weak. This means that petroleum fuel imports continue to grow, causing migas trade balance deficits as imports are much high­er than exports. When Indonesia’s domestic oil production was still high, exports could be made in large amounts. Therefore, when world oil prices rose, Indonesia had windfall profits. Indonesia was advantaged because of high oil exports. Howev­er, this lasted only until the 1990’s. On the contrary, now when world oil prices rise, we suffer from deficits. We spend more dollars for buying crude oil and petroleum fuel from outside the country, while we make very little dollars from oil production because our production is so low. This af­fects the State Budget in that when oil prices are high it is when our oil production decreases, then migas income in the State Budget also de­creases.

Market Mechanism
Bhima believes that non-subsi­dized petroleum fuel price increases because world oil prices also tends to rise, also because it is affected by the weakening of the Rupiah exchange rate. It is a vicious circle. Bhima also feels affronted with the mechanism for determining petroleum fuel pric­es. “A formal announcement should have been made three days to a week before the increase is applied. However, the Government did not do that. It is as if they think that since it is not subsidized anyway, they can raise prices as they wish with no an­nouncements being made,” he said.

The people end up having no choice other than buying fuel at such high prices. They might want to use gas­oline, but it disappeared from many Public Fuel Refill Stations (Stasiun Pengisian Bahan Bakar – “SPBU”). “The Government is trapped with en­ergy liberalism – they leave everything to the market,” Bhima said.

Kurtubi said that because it is non-subsidized petroleum fuel, there is nothing inherently wrong with that. However, the Government should have made it transparent and clear that national migas con­dition are worrisome: crude oil pro­duction or lifting is very low. In fact, at 770,000 barrels/day, it is at the lowest point in the history of national oil trade.

“The Government prefers import­ing – petroleum fuel imports increase every year. When importing, we must spend a lot of dollars to pay for it. Imagine that we use imported petro­leum fuel for more than half of the domestic needs, and we buy it with dollars whose value increases every day. This is why the Government must explain why Pertamax prices are being raised – we want the peo­ple to understand that we are im­porting extremely large amounts of petroleum fuel. Our petroleum fuel imports is even the biggest in Asia. That shows how our national migas industry has collapsed, while world oil prices continue to rise. Therefore,

it is only natural for the Government to increase non-subsidized petro­leum fuel prices,” Kurtubi said.

Bhima said that this is why Indo­nesia is an oil net importer: because domestic oil production is unable to satisfy the national consumption need.

Economist Dradjad Wibowo said that the Government has always ar­gued that by making petroleum fuel prices match market prices by re­moving subsidies, the money would be saved for other needs, such as for infrastructures. Yet, the fact is that infrastructure constructions are mostly funded by national debts, as proven with the spike of both infra­structure expenditures and national debts during Jokowi’s rule.

“The actual cause of savings is that the Government benefited from the fall of world oil prices in the past few years, i.e. from more than USD 100/barrel to USD 40.00-USD 50.00/barrel. Therefore, even though subsidies are eliminated, domestic petroleum fuel prices did not rise drastically. However, now world oil prices rise exactly when Rupiah ex­change rate to USD drops. Naturally, domestic petroleum fuel prices would rise. The Government does not have any funding sources or mechanism to prevent this rise. The steep in­crease of petroleum fuel prices shows that the Government is incapable of constructing a system that can secure Indonesia’s oil and energy market from either price risk or exchange rate risk from the global market. Government officials are better at blaming “global conditions” for covering their incom­petence than doing anything about it,” Drajad said.

Umar Juoro, Economic Observ­er from the Centre for Information and Development Studies (CIDES) said that world oil prices are high, so that Pertamina makes adjustments by increasing non-subsidized pe­troleum fuel prices. The problem is, every time petroleum fuel price rises, Indonesia’s trade balance would be negativized. A negative trade balance would further pressure the Rupiah, increasing depreciation further. This condition is worsened by the fact that Amerika and China are engaging in a trade war with the increase of Federal Reserve interest rates.

The problem is that the tendency of Indonesia’s oil production contin­ue to decrease. Combined with con­tinued weakening of Rupiah value, Indonesia’s trade balance must deal with heavy import loads.

Senior Economist Kwik Kian Gie said that prices in general are rising. Petroleum fuel price movements af­fect all sectors, as nearly all sectors are dependent on petroleum fuel. The increase of petroleum fuel pric­es is nothing more than imposing a cruel additional tax to all citizens. This increase does not reduce what is called “subsidy” expenditures.

The Government obtained profits with current prices. Why? Because there is no need to buy the crude oil located under Indonesian soil. The only costs expended until crude oil becomes gasoline are lifting, re­fining, and transporting costs. The Government does not pay for crude oil, because it is a God-given gift to Indonesians. However, it lied to the people by pricing the people’s crude oil at the price set by the New York Mercantile Exchange (NYMOEX) in the US.

Falsely Low Inflation Rates
30% of our people’s expenditure, especially among urban residents, is for buying petroleum fuel. Bhima said that this means if prices rise, people would reduce consumption of other items and transfer their budget to buying petroleum fuel. This causes increased inflation and decreased buying power. Furthermore, logistic costs also rise, forcing merchants to further adjust the prices of their goods. This is a frighteningly long-reaching and long-term multiplier effect.

“If non-subsidized fuel prices rise, that means its pricing mechanism is left to the market. That means that the Government does not mitigate the risks of fuel price increase. What do we need to prepare? What about buying power, how do we keep prices low? Then we must also make sure that gasoline is distributed evenly to all SPBUs (Gasoline stations). These are the things the Government should be doing, but they simply do nothing,” he said angrily.

Bhima admitted that inflation tends to remain low (at 3.5% until the end of the year), but that is because the price of primary necessities does not rise. This is dangerous. Low inflation is really not good news, because it means that the people’s buying power is depressed. Sellers don’t dare to increase prices, because they are afraid that nobody would be able to buy their goods. This is a false inflation rate, as it is forced to remain low.

Another indicator is that food prices, for example the prices of eggs and butchered chicken, are inflating. This is because foodstuffs are highly sensitive to Rupiah exchange rates. Dradjad Wibowo further repeated that petroleum fuel prices would cause logistic and transportation costs to increase, which will cause the people’s buying power to drop. Higher transportation and storage costs means that prices must increase if merchants don’t want to endure a loss. The same amount of money will now afford less amounts of the same goods. There should be inflation. When there is no inflation even though petroleum fuel prices rise, the statistics are suspicious and must be rechecked.

“I believe that the first-round effect would increase monthly inflation at 0.1%-0.2%. The final effect would be bigger,” Dradjad said. He said that the biggest impact of increased petroleum fuel prices is the lowering of the people’s buying power. This expands to higher costs for Government and private projects, which means that investments become more expensive, and fewer people are interested in investing in Indonesia.

Government’s Insensitivity
Bhima states that the fuel price increase demonstrates on how insensitive the Government is to the people’s interest. In this area of openness, announcements should be made, so that the people can get ready and readjust their budgets. However, the Government is neither aware nor empathetic to the interest of the people and the condition of the real sector. “I’m worried at what the people may do when their disappointment and dissatisfaction are not handled seriously. It is a time bomb. The possible future costs would be frightening: racial, religious, and political riots might occur,” he said.

As we head closer to the 2019 Elections, Bhima sees that most of the current budget items set by the Government tend to be populist instead of structural. Furthermore, the Government is busier doing political safaris than doing its job. The people might be swayed into making alternative actions during the 2019 Elections. Bhima requests that the Government create new policy packages that contain breakthrough steps, such as activating incentives to oil companies so that they would increase production. In this way, we might hope to decrease our dependence on imports. Furthermore, the Government needs to increase its Social Security (Bantuan Sosial – “Bansos”) budget to prevent poor citizens form the impact of petroleum fuel price increase.

The people should have already felt that the Government is unable to maintain the stability of petroleum fuel prices, causing such increase to be a burden on the people’s lives. “If the people are aware of this fact, would they have elected the same leader?” Dradjad said. He further requests that the ministers and officials who are related to petroleum fuel price increase to step down. They are in fact incompetent, and they tend to play at image building and hide their incompetence by increasing petroleum fuel prices in a secretive fashion. “They even choose the timing so carefully to prevent it from being major news across the media. It’s obvious that they do not protect the people’s buying power seriously. What else can I suggest but that they step back?” he said firmly.

Umar Juoro requests that the Government take steps to increases our oil and gas production seriously. Nowadays, there is barely any effort at new exploration. The Government’s main problem is that there is little incentive to attract investor, as well as tax issues. Investors are turned off when they must already pay taxes even though they have not discovered anything. We must find a solution for this.

Kwik Kian Gie criticizes the Government for being unable to develop alternative energy. Even worse, the Government does not seem to understand the cause-and-effect of petroleum fuel price movements, despite the repeated proof that each petroleum fuel price increase causes a domino effect. However, our elites never bother to make such detailed calculations. (Dessy Aipipidely/Ekawati)