THE OIL PRICE’S IMPACT FOR FUEL

PRICE IN INDONESIA

PAPERS
Structured to meet the final task subjects English II
Lecturer :Dr.Agustine Rebecca Lakawa M.S

Structured by:
AZMI ABDULLAH (071001400031)
BOBBY RIFKI SAPUTRA (071001400034)
PRADA DAMARA (071001400125)

Petroleum Engineering Majors

Faculty of Earth Technology and Energy
University of Trisakti
Jakarta
2015
 The Oil Price’s Impactfor Fuel Price in Indonesia

I. INTRODUCTION
Oil and gas revenues play strategic roles in the structure of Indonesian
economy. As a biggest oil producer in South East Asia (GFP Power, 2015),
according to the data of Global fire power, Indonesia produce 983,000 bbl /
day that put Indonesia in 21th of another country in the world. Indonesian
economy relies heavily on crude oil export revenues.
Indonesia use the subsidy system for domestic fuel (Sofyan Djalil, 2014).
The subsidy system have to adjust the fluctuation of the oil’s price. Exactly,
the fluctuation of the oil’s price very important for the fuel price include oil
fuel and gas fuel in society circle.
II. BODY

1. Indonesian Fuel Price Nowadays

The Indonesian government has increased fuel prices by more than 30% in
an attempt to save the economy more than $8bn (£5bn) in 2015. Prices were
raised by 2,000 rupiah ($0.16; £0.10) per litre, with gasoline now costing
8,500 rupiah and diesel 7,500 rupiah. Previous price increases have sparked
violent protests and reports said young people had clashed with police at a
demonstration hotspot before the announcement. The country has needed a
budget for infrastructure, healthcare and education but instead spent it on
subsidising fuel,The rise in fuel prices could push up inflation to 7.3% this
year and the impact would last until next year (Joko Widodo, 2015).
 Indonesia's $23bn fuel subsidy bill is the main reason behind its budget
deficit. It is also behind the nation's trade imbalance as Indonesia imports
much of its fuel. The economy also grew at the slowest pace in five years in
the third quarter at 5.01%, compared to a year ago.
Indonesian President Joko Widodo’s January 1 decision to abolish the
country’s fuel subsidy sent a clear signal to the money markets and
international investors that his government, installed last October, is
embarking on an extensive pro-market “reform” of South East Asia’s largest
economy.
The fuel subsidy announcement, made without fanfare, means that pump
prices will be in line with the internationally determined cost of crude oil. A
small subsidy of 1,000 rupiah (eight US cents) per litre will remain on diesel
used by public transport operators and the country’s largely impoverished
fishermen.
In 2014, the fuel subsidy cost the government 250 trillion rupiah ($US19.6
billion) or 15 percent of the state budget. The subsidy kept fuel prices low in
a country where around half its 250 million people live at or below the United
Nations poverty line of just $2 per day.
Last November, Widodo reduced the subsidy by 31 percent for petrol and 36
percent for diesel, but his actions were met with historically muted protests.
In 1998, when the military-backed dictatorship of President Suharto was
forced by the International Monetary Fund during the Asian financial crisis to
introduce pro-market measures, fuel subsidy cuts helped trigger the strikes
and protests that played a part in the regime’s collapse. Subsequent cuts by
Widodo’s predecessor, Susilo Bambang Yudhoyono, also produced
widespread demonstrations.
Widodo was able to capitalise on his promotion during last year’s presidential
election campaign as a pro-poor and democratic reformer, untouched by the
corruption of the detested oligarchies that make up the country’s ruling
circles. Above all, however, the global fall in fuel prices insulated the impact
of the subsidy cut. Even without the subsidy, petrol this month was selling for
7,600 rupiah per litre, compared with the subsidised price of 8,500 in
December.

2. The Fuel Subsidy of Indonesia

Indonesia will cap the diesel subsidy and scrap aid for gasoline, the
biggest changes to a decades-old system that has tied up budget funds and
bloated energy imports. The subsidy for gasoline will be scrapped (Sofyan
Djalil, 2014). Indonesia has been subsidizing fuel since the first oil price
shock in the 1970s and kept prices at less than $0.20 per liter until 2005,
according to a World Bank report published in March. Dismantling the
subsidy program is a political hot potato -- protests accompanied past price
increases and riots spurred by soaring living costs helped oust dictator
Suharto in 1998.
Jokowi’s fuel subsidy shake-up to free funds for development spending,
along with a clean-up of the energy industry, is encouraging some investors.
Indonesia’s bonds advanced last week, with the 10-year yield falling by the
most since October, on optimism the government would move forward with
plans to curb fuel subsidies. The rupiah rose 0.1 percent today to 12,436 per
dollar taking its gain over the past two weeks to 1.8 percent, according to
prices from local banks.
The Indonesian and international financial press were quick to endorse the
subsidy abolition, hailing it as a sign that the government is committed to
meeting the demands of the financial markets for massive infrastructure
spending and other pro-business “reforms.” Widodo is seeking to further
open up Indonesia’s natural resources to exploitation by global corporations,
as well as its potential low-cost labour force.
In his infrastructure program, Widodo has announced five deep sea and 24
smaller feeder ports, 10 airports, 25 dams, 2,000 kilometres of roads and 10
industrial parks. These are not attractive in themselves to international
investors. Investment fund managers are demanding that the government play
a major role in financing the projects. To do so, it must achieve a “better
fiscal position,” that is, impose austerity measures on the population and free
up government revenue for other spending. The abolition of the fuel subsidy
is regarded as a first step.
A Jakarta Post opinion piece on January 6, entitled “Ending rhetoric politics,
gasoline subsidy abolished,” praised Widodo. “In the midst of the global
economic slowdown,” it wrote, he “finally took real action, not rhetoric, to
prevent the national economic situation getting worse.”
The London-based Economist on January 10 called the measure “a good
scrap” that would make the economy’s “fiscal prospects brighten.” A Reuters
article on January 6 said it was a “landmark” that would be a “boost for
Indonesia.”
There are signs that the majority of the ruling elite will support Widodo’s
pro-market measures. On January 8 the two warring factions in Golkar, the
party of the former Suharto regime and the major party in the parliamentary
opposition, agreed not to disrupt or bring down the government for the next
five years.
 Widodo has set an economic growth target of 7 percent, but behind the
optimistic forecasts there is an air of panic over the country’s economic
position. Growth is slowing, and the current account deficit widening, due to
weak external demand, lower commodity prices and poor export
performance. In November, exports fell by 14.57 percent, year-on-year, to
$13.62 billion, producing a merchandise trade deficit of $425.7 million,
despite a fall of 7.3 percent in imports. Manufacturing production contracted
for the third month in a row in December.
In mid-December, the rupiah devalued 3.8 percent over three days, to 12,900
to the US dollar, the lowest level since August 1998, during the Asian
financial crisis.
The Bank of Indonesia (BI) had encouraged an undervalued currency in order
to boost exports and was keeping a reserve stock of dollars to cope with the
financial pressures produced by expected US interest rates hikes in 2015. But
as global fund managers dealt with growing risk by moving money out of
“emerging economies” such as Indonesia, the BI intervened to defend the
rupiah in the foreign exchange markets. From December 1 to December 11,
there was a capital outflow of $869.22 million.
The BI intervention brought the rupiah back to 12,500 to the dollar by
December 19, but that depleted its reserves. Even before the recent events,
and despite previously good capital inflows, Indonesia’s foreign reserves
ratios were the lowest in the region. Indonesia has sufficient funds to cover
just 6.4 months of imports and debt repayments, compared with eight months
for Malaysia and India and 11 months for the Philippines.
Last October, the BI began to move on the “worrying” high levels of foreign
private sector debt, fearing the combination of low reserves and high debt was
beginning to resemble the 1998 situation that led to default. Foreign private
sector debt had reached $161.3 billion, representing 54.8 percent of total
external debt.

3. Impact For Society Life

Basicly, The increase of fuel price in Indonesia will make another things
rise up too. The worst impact will come from groceries price that could
increase the outcome for society. The increase of groceries price is triggered
by the rise of transportation cost and small amount stock from the distributor.
Because of it, many people choose to save their money until the price get
stable.
In other side, the increase of fuel price that caused by allocation subsidy
bring some positive effect, especially for poor society of Indonesia.
 Allocation for education field really help poor students of Indonesia to get
worthy education, and allocation for health field can increase the health
percentage of Indonesian society.
Despite some protests in Indonesia’s capital city of Jakarta, the Indonesian
government raised the price of subsidized low-octane gasoline (premium)
from IDR 6,900 (USD $0.53) per liter to IDR 7,400 (USD $0.56) over the
weekend (a 7.2 percentage point price increase). Meanwhile, the price of
subsidized diesel (solar) was raised from IDR 6,400 (USD $0.49) to IDR
6,900 per liter (+7.8 percent). The price increase was considered necessary as
crude oil prices had increased over the past month, while the rupiah
continued to depreciate.
Since the start of 2015 the Indonesian government has drastically reduced
public spending on fuel subsidies (in a move to free-up funds for structural
economic and social development) by scrapping a large chunk of fuel
subsidies. Instead, the government now sets prices for subsidized low-octane
gasoline and diesel - floating in accordance with international crude oil prices
- each month. This reform was made possible thanks to low global crude oil
prices since mid-2014, implying that the impact of this reform measure was
relatively small (in fact, fuel prices fell after the government reduced fuel
subsidies in January 2015 as the subsidized prices had become unnaturally
high amid sharply declining oil prices implying that the people were
subsidizing the government at gas stations and not vice versa).
The main indicators that determine Indonesia’s monthly-adjusted
subsidized fuel prices are international crude oil prices and the performance
of the Indonesian rupiah against the US dollar. In terms of geography, there is
a difference in subsidized fuel prices as people’s purchasing power is
stronger on the islands of Java, Madura and Bali:

III. CONCLUSION
In Conclusion, Oil and Gas play roles for the fluctuation of Indonesian
Fuel price. So, the Indonesian people have to believe it or not whether the
Petroleum subsidy will be reduced or can be dismissed in Indonesia to Make
Our society do not relies of the oil’s price fluctutation in the future.
 Refferences

http://www.indonesia-investments.com/news/todays-headlines/subsidized-
fuel-prices-indonesia-raised-due-to-oil-price-rupiah/item5429
http://www.globalfirepower.com/oil-production-by-country.asp
http://www.bbc.com
http://www.bloomberg.com/news/articles/2014-12-31/widodo-makes-biggest-
change-to-indonesias-fuel-subsidy-system
https://www.wsws.org/en/articles/2015/01/15/indo-j15.html