Positive & Negative Consequences of Rising Crude Oil Prices
The Indonesian government emphasizes that the higher-than-estimated crude oil price will not destabilize the 2018 state budget. While the government set its Indonesian Crude Price (ICP) at USD $48 per barrel in the 2018 state budget, West Texas Intermediate (WTI) and Brent have already surpassed the USD $60 per barrel level, significantly higher than the assumption of the Indonesian government and therefore triggering some concern over rising energy subsidies.
Indonesian Finance Minister Sri Mulyani Indrawati said there is no need for concern - related to the crude oil prices - at this moment. In fact, the higher-than-assumed crude oil price impacts positively on Indonesia's state revenue. For every USD $1 per barrel that is higher than the assumed ICP in the state budget, the government receives an additional IDR 1.1 trillion (approx. USD $82 million).
Meanwhile, state-owned energy company Pertamina's financial conditions are strong, Indrawati added, and it can therefore cope with pressures that originate from the higher crude oil price. Last year Pertamina did not cut its fuel prices when global oil prices slid and therefore it managed to obtain profit. This profit can now act as buffer as the company sells subsidized fuels below the market value amid higher crude oil prices.
In October 2016 the government also launched the single-price fuel program. Through this program Indonesians pay the same price for fuel across the country. Due to the huge size of Indonesia and the difficulty to reach the remote areas, there had emerged a big gap between fuel prices. With the single-price scheme in place, fuel in remote areas requires a higher amount of subsidy. Pertamina is estimated to spend between IDR 800 billion and IDR 1 trillion (approx. USD $67 million) in 2018 to support the program in 54 of Indonesia's most remote areas.
Suahasil Nazara, Fiscal Policy Head at Indonesia's Finance Ministry, said subsidy reports still need to be audited before a decision can be taken. He added that it is the Ministry of Energy and Mineral Resources that has the authority to alter the allocation of energy subsidies. However, the government already announced that in the first quarter of 2018 there will not be a change in subsidized fuel prices. This decision was made with the intention to boost people's purchasing power.
Although the government uses a formula that is highly dependent on global crude oil prices to determine subsidized gasoline and diesel prices at home, the government has not changed these domestic prices since April 2016. However, as global crude prices have risen significantly since that time, there are rising pressures on the government to adjust prices of gasoline and diesel.
Although state revenue will rise considerably, particularly provided the ICP reaches beyond USD $70 per barrel, there are negative consequences for the Indonesian economy. The government will need to pay more energy subsidies, or, in case the government raises fuel prices, logistics costs as well as production costs will rise (implying declining competitiveness), while people's purchasing power weakens as well.
However, whether global crude continues to rise this year, remains to be seen. Prices could slide back to the range of USD $50 - $55 per barrel as US shale gas production is estimated to rise up to 10 million barrels per day this year.
State Budget of Indonesia:
| State Budget 2017 (Unaudited) |
State Budget 2018 (Revised) |
State Budget 2018 (Original) |
|
| GDP Growth annual % change |
5.2 | 5.4 | 5.4 |
| Inflation annual % change |
4.3 | 3.5 | 3.5 |
| Exchange Rate IDR/USD |
13,400 | 13,500 | 13,400 |
| 3-Month Notes coupon (%) |
5.2 | 5.3 | 5.2 |
| Crude Oil Price in USD per barrel |
48 | 48 | 48 |
| Crude Oil Lifting 1,000 barrels per day |
815 | 800 | 800 |
| Natural Gas Lifting 1,000 barrels per day |
1,150 | 1,200 | 1,200 |
Sources: Finance Ministry & Commission XI DPR
Indonesia's Energy Subsidy Spending & Indonesian Crude Price:
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017¹ | 2017 | 2018¹ | |
| Subsidy Spending (in IDR trillion) |
306.5 | 310.0 | 341.8 | 137.8 | 106.8 | 89.9 | 97.6 | 94.4 |
| 1. Fuel & LNG (in IDR trillion) |
211.9 | 210.0 | 240.0 | 64.7 | 43.7 | 44.5 | 47.0 | 46.9 |
| 2. Electricity (in IDR trillion) |
94.6 | 100.0 | 101.8 | 73.1 | 63.1 | 45.4 | 50.6 | 47.7 |
| ICP (in USD/barrel) |
112.7 | 105.8 | 96.5 | 49.2 | 40.2 | 45.0 | 50.0² | 48.0 |
¹ assumption set in revised state budget
² preliminary figure
Source: Finance Ministry of Indonesia