Indonesia Topics

Indonesia will soon raise fuel prices by up to 30 percent to avoid a budget blowout amid the soaring cost of oil on the global market, the government said Monday.

The decision to cut subsidies that keep gasoline, diesel fuel and kerosene affordable to the country’s millions of poor risks nationwide demonstrations and political opposition from parties jockeying for position ahead of elections next year.

The government last raised prices in 2005, defying protests and winning praise from international donors. To cushion the blow, it provided direct cash payments to the poor - a policy it is sure to repeat this time around.

President Susilo Bambang Yudhoyono said the government was no longer debating whether to raise prices,but rather by how much and when. The discussion now is “whether it will be 20, 25 or 30 percent and why will it be that,” he said.

Senior Economic Minister Boediono said the government was planning to raise prices in the “coming weeks” and that the poor would receive some form of direct compensation. He gave no more details.

Any price hike is sure to trigger inflation in the country of235 million people and risk hurting economic growth as its poorest citizens struggle to afford rice and other staples amid rising food costs.

Still, most in Indonesia agree the current level of fuel subsidies are unsustainable as global prices hover around US$117 a barrel.

Critics note they are also enjoyed by many of its wealthiest citizens, who currently spend just under half a dollar for a liter of gasoline for their cars.

Indonesia is Southeast Asia’s largest oil producer and a member of OPEC, but it has to import oil because of decades of declining investment in exploration and extraction.

A big fuel price increase in 1998 triggered rioting that helped topple former dictator Suharto. Protests also forced former President Megawati Sukarnoputri to scale back a fuel price increase in 2002.(The Jakarta Post - The Associated Press)

The 2008 state budget will withstand heavy pressure from skyrocketing oil prices until the Indonesian Crude Price (ICP) averages US$125 per barrel, a senior official says.

The director general of oil and gas at the Energy and Mineral Resources Ministry, Luluk Sumiarso, said the government did not need to worry about plugging the swollen fuel subsidy because it was still expecting to enjoy a surplus from oil price hikes at $125 a barrel.

ICP is the country’s oil price benchmark used for oil transactions and state budget assumptions. The ICP is usually slightly lower than the global price of oil.

The ICP price from January and March averaged $103.10 per barrel, according to ministry data. This was lower than the widely used U.S. crude oil benchmark, WTI, which averaged $105.46.

Still, the ICP has surpassed this year’s state budget assumption of $95 per barrel. Using this assumption, the government allocated Rp 126.82 trillion for fuel subsidies and Rp 60.29 trillion for electricity subsidies this year.

The figures are almost triple previous estimates.

Luluk’s remarks come as global oil prices hover at a new historic high of $115 a barrel, sparking concern for the sustainability of the state budget.

He did not say what measures would be taken if the ICP’s average surpassed $125 a barrel.

Energy and Mineral Resources Minister Purnomo Yusgiantoro ruled out Thursday the option to raise domestic fuel prices to ease the subsidy burden, reiterating the government’s pledge to not do so until 2009.

Rather than increasing fuel prices, Purnono said, the government would intensify efforts to slash the amount of subsidized fuels on the market, using various programs including “control cards” for households eligible for fuel subsidies.

This year, the government capped the amount of subsidized fuel at 35.5 million kilo liters (kl), down from 38.6 million kl last year.

Responding to whether the government should impose a windfall profit tax on oil producers (who are benefiting the most from the oil price hike), Purnomo said this would only be applicable to certain contracts.

“We are studying the state of the contracts because we should uphold the integrity of contracts.

“We are in talks with some producers to revise the fiscal terms and conditions, but we are not going to apply it (the windfall profit tax) in general,” he said.

He said the current production split (of 85:15 in favor of the government) still benefited the government.

The Indonesian Petroleum Association (IPA) vice chairman Sammy Hamzah said a windfall profit tax was actually understandable, although prior discussions with producers were needed to make sure it would be mutually beneficial. (The Jakarta Post)