INDONESIA’S ENERGY ADDICTION The looming dilemma of fuel subsidies

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pertamina
(Source: MYPERTAMINA)

Jakarta, IO – The price of crude oil has risen to an unsettling level that threatens to slow down the domestic economy. As Russia has its energy card as the most potent weapon against western sanctions, it is not anticipated that the conflict between Ukraine and Russia would deescalate anytime soon. Russia will be more confidence to continue its military aggressiveness if crude oil prices rise. Putin’s warning that if western sanctions on Russia are tightened, oil prices could rise to $300 per barrel presages a nightmare that we must confront. Any increase in oil prices is uncertain, thus many nations are under pressure to start reevaluating their energy security policies, pointedly their fuel subsidies. 

The price of subsidized fuel is still held steady by the Indonesian government, at least so far, even though the energy subsidy budget has swelled ominously. If crude oil prices stay at US$90- 110 per barrel this year, the compensation fund and energy subsidy budget is estimated to exceed IDR 520 trillion. Current fuel subsidies can still be covered by the commodity price windfall, but this seems only a temporary respite. Dependence on the roller coaster of commodity prices can mean a blunder for state revenues. As a matter of fact, on July 22, 2022, several commodity prices, such as those for CPO and nickel, began to decline, settling by -21.9% and -7.9%, respectively, compared to where they were last month. Moreover, if we go into an economic recession, it will result in differences between commodities: the price of crude oil will remain expensive, while other commodities, such as CPO, will fall sharply. The fortuitous commodity bonanza has indeed delivered a state budget surplus of IDR 130 trillion until May 2022, but conditions can quickly degenerate into a deficit. The state vacation is liable to be over soon. 

The significant increase in global oil prices and domestic fuel consumption, followed by the easing public mobility, also contributed to the country’s oil and gas shortage. The oil and gas deficit increased from USD 5.7 billion to USD 11.7 billion between January and June 2022. The impact of this sudden increase in the oil and gas deficit has been felt, weakening the Rupiah exchange rate and increasing the cost of fuel subsidies. ( Figure. Oil and Gas Trade Deficit and Crude Oil prices ) 

An obvious victim of painful oil prices, creating chaos in their currency, is Sri Lanka. The higher the price of oil, the worse the condition for that small island nation. The country can end up not only in sovereign bond-default status, but as a failed state, due to complex problems. At that point, the Government loses its legitimacy to lead. In March, the Sri Lankan government jacked up gasoline prices by 24.3% and diesel by 38.4%, the highest price increases of all time. 

The pattern of inflation brought on by war and rising crude oil prices is reminiscent of the 1970s recessionary decade. In contrast to the Asian Financial Crisis of 1998, which began with a decline in the currency rate in South Korea, moved to Thailand, and then to other Asian nations, including Indonesia, the current crisis will be global in scope. In fact, the current global recession is almost equally dispersed throughout different nations; it has even been shown to produce instability and social unrest in several nations; protests are currently taking place in both Lebanon and Sri Lanka. The trigger can be the price of oil. 

The nations that are nearest to Indonesia that are on the verge of bankruptcy, aside from Sri Lanka, are Myanmar and Laos. Economic issues in these two nations are predicted to be quite risky for the Asian region. In addition to having ongoing political unrest, Myanmar is the country most impacted by the pandemic. In 2021, Myanmar’s economic growth decreased significantly, by -18%. Laos is too dependent on its debt with China, which accounts for 47% of the total, but the small landlocked country’s aggressive construction of debt-financed infrastructure debt, amid declining revenues and rising fuel costs, puts it on the verge of sovereign debt bankruptcy. 

In the context of a fuel price policy, since the Indonesian government has perceived how other countries are starting to suffer hyperinflation leading to an economic recession, especially middle-income countries, subsidized fuel prices will remain on hold. However, the yawning price difference that a subsidized price entails presents quite a dilemma. If prices are released to match market levels through a neoliberal scheme, then the Government may stand accused of triggering excessive inflation and hitting the purchasing power of almost all groups of consumers. Meanwhile, what is needed at this time from the state is protection, in the face of a potentially devastating global economic recession. 

Business actors in Indonesia are still worried that if fuel prices rise too high, there is fear of a significant spike in production costs, while the public will reduce their purchases of secondary and tertiary products significantly; for instance electronics and automotive sales will plunge. With current conditions alone, for the first quarter of 2022, inflation on the producer side, according to Statistics Indonesia, has reached 9% on an annual basis. Moreover, there is an increase in the price of fuel, following the price of oil at the market level; what threatens is stagflation, where the price increase is not accompanied by any increase in production output or employment opportunities. Indonesia could join the “recession country club”.