In the midst of the global economic slowdown, President Joko ‘Jokowi’ Widodo finally took real action, not rhetoric, to prevent the national economic condition from getting worse.
Jokowi and Sudirman Said have shown that this government has the courage to end the wrong energy policy, i.e. subsidy, that has gone unresolved for many years. This government certainly has the guts to do what needs to be done.
This decision came as a great relief after months of rhetoric. The decision to end gasoline fuel subsidies is a kind of relief. This decision answered all the doubts.
Fuel subsidies have always been an issue for the Indonesian government for more than a decade. The growing consumption and the volatility of global oil prices have taken a toll on the state budget (APBN). In 2014, the total fuel subsidy reached a staggering figure, Rp 250 trillion (US$19.6 billion), or roughly 15 percent of the state budget.
Ending the fuel subsidy will provide the government with ample fiscal room to finance infrastructure projects that they have planned. It is estimated that more than Rp 200 trillion will be saved. This ‘extra money’ can be used to finance infrastructure projects and other productive economic sectors.
With this fund, millions of jobs can be created, and the domestic economy can be stimulated. An action that is much needed in the global economic slowdown.
Ending the fuel subsidy will also bring many other benefits. By setting fuel prices at the market price, it will create a market opportunity for new players, open up more fair competition and, thus, better products and services for consumers.
Java, Bali and Sumatra accounted for roughly 75 percent of the total consumption of the low-quality gasoline (RON 88). That means there is a market of more than 150 million barrels open for competition. Surely the size of this market is very attractive.
It would not be too surprising if other oil companies, such as Shell and Total, which already have gas stations in Jakarta, jumped into the game. Thus, it is likely that in the near future Pertamina will not be the only company selling RON 88. Pertamina has to improve its competitiveness to maintain its market share.
The only way to do that is for Pertamina to take real action instead of just using rhetoric.
Last week the oil reform team recommended that Pertamina reassign the tendering and procurement authority from its trading subsidiary, Petral, to Pertamina’s Integrated Supply Chain (ISC).
Currently, the head of ISC is Daniel Purba, who was a member of the oil reform team. In the context of improving transparency and efficiency, this recommendation can be seen as a mere rhetoric.
For many years, Daniel Purba was an executive of Petral whose prime responsibility was to procure crude oils and fuels. He knows very well that the problem is not simply in the tendering process.
The real problem is with the lack of transparency in the fuel mixing at Pertamina. Crude oil mixes vary each month based on monthly refinery processing plans. Because there is no fixed baseline crude for this mix, the refining economy can be easily manipulated to suit oil mafia operations.
The mix is designed to give maximum refining value for crude owned by the mafia. Thus, when Petral is instructed to do a tender, everything has been set to favor a certain type of crude.
Thus, disbanding Petral from conducting tendering by itself will not guarantee more transparent and efficient crude oil and fuel purchasing. Without improvement in transparency and efficiency, Pertamina will lose a significant market share of gasoline in Indonesia.
Pertamina needs to stop playing games with rhetoric and instead take real action.
The second benefit of removing the subsidy is fuel efficiency. There is a tendency for people to spend wastefully on things they can get cheap. This behavior will fade out quickly after the subsidy is removed.
As they have to pay market price, they have to start thinking about efficiency to manage their spending on fuel. Some expected changes are that people will stop traveling unnecessarily, prefer more fuel-efficient products and start taking public transportation or consider carpooling.
Eventually, all of these changes will be reflected in the energy intensity. Currently, Indonesian energy intensity is still very high. It is about twice as high as it is in the United States or Australia.
That means that to generate the same gross domestic product (GDP), Indonesia requires twice the energy than the US, Australia or other developed nations require.
The third benefit is that the removal of the fuel subsidy will accelerate a transition to a low-carbon economy. Market price fuel will discourage consumers from excessive consumption, leading to less pollution and greenhouse gas emissions.
According to the International Energy Agency, the elimination of the fuel subsidy is the most effective means for climate change mitigation.
The removing subsidies will also encourage the development of renewable and alternative energies. Most renewable power sources are competitive when compared to those using unsubsidized fuel.
To accelerate this country further, the government can use money previously used to subsidize gasoline on renewable energy projects. This incentive can be given in the form of research and development assistance, tax incentives or investment credits.
Now that the biggest issue in fiscal management of the downstream sector has been solved, we are waiting for more actions on the upstream side of the economy. We have heard enough nationalistic sentiment/rhetoric used in the management of the upstream sector. Let’s hope that Jokowi has the guts to stop this detrimental political distortion and start working to ensure the increase of oil reserves and production.
It is wrong to play rhetorical politics. The Indonesians want their life to prosper. And that requires government actions, not just rhetoric.
As Published on Jakarta Post