GOV’T RAISES FUEL PRICES BY 30% A choice between National Budget, Pertamina Finances and Market Price

Pertamina increasing subsidized fuel price 3
(IO/Muhammad Hidayat)

If not coupled with the right policy response, surging global oil prices could potentially impact the financial performance of energy SOEs, particularly Pertamina. Although the price adjustment has been made, the price of fuel sold by Pertamina is still below the market price. Verifying the accuracy of this information is actually quite simple: the public only needs to compare the price of fuel with the same RON sold in other countries. 

All countries basically buy oil at the same prices on the international market. What makes the prices vary is the difference tax and subsidy policies. In countries with high per capita income, fuel is generally more expensive, while countries with low per capita income and oil-producing countries generally sell at a lower price. 

According to GlobalPetrolPrice, the average selling price of RON95 gasoline as of September 12 in the Philippines is Rp19,618 per liter, Thailand Rp17,663 per liter, Vietnam Rp15,026 per liter, Laos Rp23,763 per liter, and Singapore Rp29,122 per liter. What about Indonesia? Rp15,486 per liter. 

From a macroeconomic and purchasing power perspective, the cheap fuel policy is positive and necessary to a certain extent. It can drive people’s activity and mobility. Cheap fuel can also potentially increase the production and distribution of goods and services vital for recovery during and after the pandemic. In other words, cheap fuel prices can serve as a catalyst for national economic growth. 

However, from the perspective of balance sheet and financial performance of energy SOEs, the policy needs to reviewed amid rising global oil prices. As Indonesia is a net oil-importing country, the cheap fuel policy requires enormous fiscal support. In this case, there are relatively only two available policy options: keep dishing out subsidies or let Pertamina be mired in financial distress. 

Calculating a market price 

The controversy regarding the fair price, or what is often referred to as the market price of fuel, intensified when the Energy and Mineral Resources (ESDM) Minister and the Finance Minister submitted different data. The public can’t be blamed for questioning the discrepancy. 

This is compounded by information circulating on social media about how to calculate the market price of fuel, leading to two sets of perceptions. First, the government is considered insufficiently transparent in providing information about the market price of fuel sold domestically. Second, there has never been a fuel subsidy and compensation because the current selling price is thought to be above the market price. 

Because it is quite technical, it is not easy to convey information on how to calculate the market price of fuel in layman’s terms to the public. Prices in oil refineries are generally also quite dynamic, so prices of the final products are not always the same. The type of crude also needs to be factored in. 

In technical language, the final product will depend on the crude assay. Through the crude assay, we can know the composition, starting from LNG, LPG, kerosene, gasoline, diesel, and their residues. One study found that the average BRENT oil refinery process would produce this composition: Butane and Lighter (2.9%), Lt. Naphtha (9.2%), Hvy Naphtha (21.3%), Kerosene (15.6%), Diesel (16.7%), Vacuum Gas Oil (24.5%), and Vacuum Residue (9.7 %). 

Based on this, it can be assumed that 1 barrel of crude will not result in 1 barrel of fuel. In terms of volume, it is clear that the refining process will produce residues and other derivative products. This explains why the calculation of the market price of fuel is not as simple and straightforward as many people imagine.