Pri Agung Rakhmanto
Founder and Executive Director ReforMiner Institute
Indonesia Finance Today, March 30th 2011
A classic problem of subsidized fuel needs policies and breakthroughs which not only are rational, implementable and effective in current situations, and sustainable in the long-run.
The discourse of subsidized fuel limitation is quite rational, but will potentially be distorted with misuse and black market sales, thus it becomes non-implementable and ineffective.
Raising the price which is usually taken as the last resort when the State Budget (APBN) is on the brink of going bust is quite rational, implementable and effective in the short-term, but not for long, as it is only an ad hoc policy.
Evidently, every time there is a hike on the world oil price like today, the State Budget is suppressed once more by the additional deficit, due to the swelling subsidy for fossil fuels and electricity. The implementation of a floating price policy for subsidized fuel might be the right answer.
Basically, the policy is locking the percentage of subsidized fuel on a certain economic price and letting it float in accord with the current movement of oil price.
The price adjustment can be performed once or twice a month. Hence, whether they go up or down, fuel prices would still be subsidized on a constant percentage.
The percentage would be kept at a constant level throughout the ongoing budget year, as it would represent the political commitment of the state in providing subsidy for the people within the allocated budget.
There are three main purposes for the fluctuating subsidized fuels. First, the country specifically the State Budget can be liberated from the classic problem of fuel subsidy coming from the hike of oil price.
Second, we, as an oil-producing country can also reap the benefits of windfall when the oil price rising. The higher the price, the larger the windfall that we have; unlike nowadays, where the oil price hike only means suppressing the State Budget.
Third, the economy as a whole the government, businesses, and people can be accustomed to fluctuating fuel prices, because that is the way the economy is supposed to be, hence, it can be more adaptive to the dynamics through times.
The allocated fuel subsidy in a budget year under basic conditions based on the macro assumptions of the State Budget would always provide a certain percentage of subsidized fuel prices over their economic price.
For the 2011 State Budget, based on the review of ReforMiner Institute, the percentage would be 65.59 percent for Premium [RON 88 gasoline], 64.31 percent for diesel fuel, and 36.41 percent for kerosene; which then be translated into 4,500 rupiah per liter for Premium and diesel fuel, and 2,500 rupiah for kerosene. Currently, the state subsidizes 34.41 percent, 35.69 percent, and 63.59 percent, respectively.
The percentage of subsidized fuel prices and their economic prices 65.59 percent for Premium, 64.31 percent for diesel fuel and 36.41 percent for kerosene are the ones that should be kept constant, at least throughout 2011, should the policy of fluctuating fuel price subsidy be implemented.
As the macro assumptions in the 2011 State Budget, particularly on the Indonesian Crude Price (ICP), are not viable with current conditions (basic conditions not conforming to the macro assumptions), and the subsidized fuel price which is yet be adjusted, the initial point of reference would need to be in agreement first.
Assuming the ICP is at US$ 100 per barrel, while the State Budget s other macro assumptions like currency and lifting are met; the review of ReforMiner Institute calculates that the percentage of subsidized fuel prices are only 53.57 percent for Premium, 52.50 percent for diesel fuel and 29.70 percent for kerosene.
The circumstances should they be maintained will disadvantage the State Budget, as its deficit keeps piling up following the oil price hike. And it can be avoided with the implementation of fluctuating subsidized fuel prices, which can be initiated with the price adjustment. The adjustment is needed to make the State Budget remain at the positive-neutral side without adding deficit over the oil price movement.
For the ICP set at US$ 100 per barrel, the fuel prices need to be adjusted to 5,510 rupiah per liter for Premium, 5,512 rupiah for diesel fuel and 3,065 rupiah for kerosene.
The Rupiah appreciation and the changes on the State Budget s macro assumptions, which should be stated on the Revised State Budget, the price adjustment which would be decided as the starting point can be set lower, at 5,000 rupiah per liter for Premium and diesel fuel, and 2,750 rupiah for kerosene, making it less burdensome to the consumers.
The complete calculation on the ICP movement and its impact on the economic prices of fossil fuels, the existing subsidized fuel prices and the magnitude of the State Budget revision on oil and gas revenue in 2011 should the fluctuating price policy be implemented excluding the revised macro assumptions, can be seen on the table.
The table shows that within the ICP span of US$ 80 to US$ 120 per barrel, the Premium price would move anywhere between 4,500 to 6,520 rupiah per liter, or at 65.59 percent over its economic price; diesel fuel, 4,500 to 6,525 rupiah per liter, or 64.31 percent; and kerosene, 2,500 to 3,630 rupiah per liter, or 36.41 percent. In the price span, the net windfall which can be generated is ranging from none to 33.3 trillion rupiah.Should the ICP be set below US$ 80 per barrel, the prices of Premium and diesel fuel would be lower than the current price of 4,500 rupiah per liter, with the extent of price drop directly correlating with the decreased ICP. At the ICP below US$ 80 per barrel, the policy is basically implemented to keep the impact of crude price movement to stay neutral to the State Budget. The revision of oil and gas revenue is equal to the alteration on the energy subsidy plus the revenue from the oil and gas production sharing contracts.
By making the impact neutral, the policy could mean that the state would not reap any benefit from the decreased oil price, but it would consistently be providing subsidy for the people by lowering the fuel prices. With an exception on kerosene, as its economic price is still too high, it needs a steady pricing at 2,500 rupiah per liter as its lower limit.
A similar policy pattern could be sustained in the upcoming budget years by locking the percentage of allocated subsidy for fossil fuels on the total state spending first.
With the parameter of subsidized fuels in volume continuing to rise annually, the locked percentage of subsidy allocation, then the percentage of subsidized fuel prices over their economic prices could be adjusted accordingly.
In other words, aside from the aforementioned three benefits, the economic price of fossil fuels in the future can be obtained gradually without the inherent public shock.
The economic prices of fuels need to be implemented to encourage the development of alternative energy sources like gas and bio-fuels. By implementing the fluctuating price of subsidized fuels, the State Budget and national economy as a whole can be liberated from the risk of an oil price hike, and they will be healthier in the future