Fuel Pricing and Subsidies in Indonesia : Reaching an Equitable and Sustainable Policy

Abstract

Indonesia is an oil producing country and is the only East Asian member of the Organization of Petroleum Exporting Countries (OPEC). Over the years, this endowment of oil resources has been steadily exploited with substantial rents flowing to the government from production and exports of crude oil. The country is also one of the world's largest exporters of another petroleum resource, liquefied natural gas. The introduction of a new oil and gas law in 2001 (the law) provides the policy and legal basis for moving away from the present ineffective and fiscally inefficient fuel pricing and subsidy regime, towards the goal of an independent, reliable, transparent, competitive, efficient, and environmentally friendly petroleum sector that encourages the growth of the national potential and role and at the same time does not exclude the Government of Indonesia (GoI) fully meeting its social responsibility towards certain community groups. Implementation towards achieving the goals set out in the Law has been slow and hesitant. The Indonesian treasury is still saddled with a rather inefficient and ineffective fuel pricing and subsidies regime. This present report identifies a way forward for Indonesia to meet the requirements of the Law. That way forward will progressively eliminate the waste inherent in the present system, signal correct market behaviors to consumers, achieve large fiscal savings and help the economy grow while the any negative impact on the poor and vulnerable are cushioned. Chapter one tracks the recent history to the present situation in terms of petroleum fuels utilization, supply, pricing and subsidies, and identifies some of the key impacts of the prevailing policies. Chapter two identifies the target petroleum fuel market regime based on the goals established in the law, evaluates where the present policy falls short, and proposes measures that will help Indonesia achieve the outcomes that are consistent with the law. Chapter three proposes a step-wise transition that will be required to transform the present regime and at the same time opening the oil products market to the beneficial forces of competition and restructuring Pertamina's downstream operations.