RISING DEMAND, UNCERTAIN SUPPLY,

AND PRICE MANAGEMENT

Asclepias R.S. Indriyanto, Bobby A. T. Wattimena,
Hakimul Batih, Indra Sari, Triandi

Abstract
The lack of balance between supply and demand is the main focus of attention and
core element of this energy security analysis. The increase in the need for energy in
Indonesia is heavily influenced by the macroeconomic conditions and also the still
inefficient usage of energy. As well, the uncertainty of supplies has roots in
Indonesia’s dependence of fossil fuels, limited infrastructure, non-sectoral policy,
world market dynamics, and environmental factors, including natural disasters. In
such conditions, the management of subsidized energy prices becomes a complex and
difficult job that taxes the stamina of the nation and hinders all aspects of
development.

Keyword: Energy Security, Rising Demand, Uncertain Supply, Price management

1. Introduction

The energy sector plays a major role in human life. The adequacy and dependability of
energy supplies, both from the points of view of quality and quantity, are vital in the
development of all fields of endeavor. The increasing need for energy is occurring in every
nation across the globe. Many countries continue to depend primarily on fossil energy to
fulfill their energy needs. In the meantime, concern over the limited reserves of fossil energy
and the worsening impact of the use of fossil fuels on the environment fill out the portrait of
this global phenomenon.

Even though the problem is global, there are a variety of local characteristics and factors that
are different. Besides that, varied levels of endowment and capacity have diverse implications
on the necessity for each nation to make efforts in line with the conditions faced.

As a developing nation, Indonesia has and continues to need increasingly large amounts of
energy from year to year. Since 1990, according to the most recent calculation of a 15-year
period of energy usage (without calculation of biomass), energy utilization rose from 248
million barrels to 594 million barrels, or a yearly average (CAGR) of 6 %. A large part of the
need was met by fossil energy, primarily crude oil that falls into the category of depleted
resources.

Due to the exploitation already done, Indonesia’s fossil energy reserves are thinning
continuously. Additions to the fossil energy reserves this decade have been minimal, while
the sustainable utilization of renewable energy sources will take time, concerted effort and a
great deal of expense. For that reason, serious attention must be paid to solving this problem
in the short term and innovation done to increase productiveness in energy utilization so that
increases in demand can be controlled in to order to prevent disruption of development.

This article discusses various elements influencing the balance between the increasing energy
needs and the supplies to meet those needs. Part 2 of this article discusses the increase in
energy demand from the point of view of population and per capita income, energy
consumption patterns, the development of infrastructure, and changes in economic structure.
The uncertainty of supplies is discussed in part 3, with a focus on the impact of dependence
on fossil fuel energy, infrastructure limitations, non-sectoral policy, world energy market
dynamics, and environmental factors, as well as natural disasters. The last section discusses
the impact of energy price and subsidy policies that heavily influence efforts toward energy
management in Indonesia.

2. Rising Demand

The total final form of energy consumption grew 4% per annum during the period of 1990-
2005 and reached 864 Million BOE in 2005. As shown in Figure 2.1, 60% of final energy
consumed, plus a large portion of the input for electricity generation, are fossil fuels. It is
estimated that during that period the use of biomass, mostly fire wood, had been reduced
from 48% in 1990 to 31% in 2005.

Many factors influence the increase of energy needs. Population growth, the change in
composition and characteristics of the economic sector, and infrastructure development are
among the elements contribution to the increase in the need for energy.
Million Barrels of Oil Equivalent

Note: Natural Gas consumption is not included for non energy utilization
Source: Handbook Statistik Ekonomi Energi Indonesia 2006

Figure 1. Final Energy Consumption

Population Growth
Population growth is one of the main components influencing the level of energy
consumption. Each individual needs energy to live, so each addition to the population means
an increase in the need for energy. As can be seen in Figure 2, in the period of 1990-2005 the
population of Indonesia rose and average of 1.4% per year, while final energy consumption
increased 6.3% per year.
GDP Growth
In the same period of time, in terms of price constants, the GDP for 2000 experienced an
annual growth of 4.7%. Figure 2.3 shows that the GDP rose sharply during the economic
crisis in 1997-1998, although energy consumption was not much affected. This was also true
in the following period, with the energy usage trends remaining stable but strong, even
though the GDP was lower that in the period before the crisis.

Source: Handbook Statistik Ekonomi Energi Indonesia 2006

Figure 2. Energy Consumption and Population 1990-2005

Source: Handbook Statistik Ekonomi Energi Indonesia 2006

Figure 3. Energy Consumption and GDP 1990-2005

Figure 2.4 indicates that throughout the period of 2001-2005 average per capita income rose
consistently in most regions in Indonesia, except Nanggroe Aceh Darussalam, Riau, East
Kalimantan, and North Maluku provinces. Taken into consideration with the contents of
Figure 3., this indicates that the public’s need for energy grew in line with their income, and
that this phenomena affected various regions scattered throughout Indonesia.

Source: Central Statistics Agency, 2006

Figure 4. GDP Per Capita at 2000 Constant Price

Consumption Pattern
Figure 2 and 3 also indicate changes in the lifestyles of Indonesians. The mobility of
automobile owners was higher than previously as seen from the high increase in the number
of vehicles and the heavier traffic on roads/streets in various regions and cities in Indonesia.
As well, more and more households were using a wider variety of electronic equipment. In
addition, malls with air conditioning and bright lighting were springing up everywhere like
mushrooms in the rainy season. All of these changes were reflected in the per capita energy
consumption that rose from 1.2 BOE/person to 2.5 BOE/person in the period of 1990-2005.
This means that the current energy need for each individual has doubled over the past 15
years, even though on the national level the overall growth in energy consumption was more
moderate in the period of 2001-2003 and after 2004.

In Figure 5 it can be seen that in order to generate national income, Indonesia’s energy needs
in year 1990 stood at approximately the same level as in other countries in Asia. All nations
represented in this graphic were experiencing economic growth within the stipulated
timeframe. However, Australia, China, India and Singapore were able to significantly
decrease their need for energy per income unit over the following decade. The phenomenal
economic growth of China and India occurred in parallel to increasingly efficient use of
energy. In the meantime, Malaysia and Thailand tended to need more energy to support their
high level of economic growth. In the same period, conditions in Indonesia showed no
significant change.
Various examples of these conditions indicate that economic development does not have the
be parallel to the per GDP increase in energy needs. This means that efforts can be made to
conserve energy without disturbing economic growth. Energy conservation along with
increased utilization productivity and the selection of efficient equipment will reduce the
burden of unnecessary expenses. A number of nations have become aware that controlling
increases in energy consumption is the cheapest easiest method for ensuring energy security
and sustainability of development. Japan can be seen as a benchmark for high level energy
efficiency in support of the economy. Indonesia needs to determine how to development and
grow without wasting energy.

Sources: International Energy Agency (IEA), US-DOE

Figure 5. Energy Intensity of Selected Asian Countries

Economic Structure
Shifts in economic structure also contribute to increased energy demand. In 2002, demand in
the agricultural, industrial and service sectors reached 16%, 44.6%, and 39.3% respectively.
In 2006, the energy demand for those sectors was 12.9%, 47%, and 40.1% respectively. From
this data we can see a decrease in the GDP in the agricultural sector and increases in the
industrial and service sectors. Keeping in mind that the conventional agricultural sector in
Indonesia needs little energy in comparison to the industrial and service sectors, the changes
in the economic structure also contribute to the need for energy.

Infrastructure Development
The development of infrastructure is an important change in the process of development. The
historical data on energy needs in Figure 1 – 3 indicate that the condition of suppressed
demand results from the current lack of adequate infrastructure. As can be seen in Figure 2.1,
much of Indonesia’s populace continues to depend of wood for fuel because there is no other
alternative for them. The development of gas pipes has long been awaited by factories and
power plants. The opening of roads in various areas increases the number and mobility of
vehicles.
In order to expand the area of electricity service coverage from the current coverage of only
half of Indonesia’s populace, the government targets full coverage by 2020, the 75th
anniversary of Indonesia’s independence, through its ”75/100 Program”. In order to make
this program work new connections must double annually from the level achieved in 2005.
The implication is that capacity for electricity production, and the transmission and
distribution channels must be expanded in order to facilitate provision of more power to
existing and new customers.

The various changes created through the construction of infrastructure constitute motivating
factors in energy consumption. For that reason, the government’s recent attention to
infrastructure indicates the potential for acceleration of energy consumption growth in the
near future, especially if energy use patterns continue as they are now. This means that
energy needs will increase and the burden will increase. These programs will require the
support of careful planning in order to ensure the improved quality and quantity of energy
supplies, as well as efforts toward increasing efficiency and productivity on the part of energy
users. Without such support programs, the development of infrastructure will be little more
than just physical construction that will exacerbate energy shortages.

3. Uncertain Supply

Several important factors influencing the uncertainty of energy supplies in Indonesia are
dependence on fossil fuel, non-sectoral policy, lack of infrastructure, world energy supply
and demand dynamics, as well as the environment and natural disasters.

Fossil Fuel Dependency

Indonesia is a nation with a wide variety of potential energy resources. However heavy
dependence on fossil fuel continues up to now as can be seen in Figure 6. In 2005, total
primary energy supplies stood at 1.2 billion BOE, including export-import and biomass,
almost all of which was firewood. Fossil fuel made up 73% of that total. If only modern
energy is calculated, then fossil fuels made up 94% of the total primary energy supplies
energy.

Crude oil and other similar energy products are primarily utilized by Indonesians. The efforts
to reduce dependence on crude oil undertaken thus far have also involved a focus on usage
of fossil fuel based alternative fuels. The consumption segment for coal quadrupled in the
period of 1990-2005, with the total volume rising seven times from 9.4 million BOE to 72.6
million BOE. Even though the natural gas segment remained relatively stable, physically the
volume more than doubled from 43.9 million BOE in year 1990 to 99million BOE in 2005.
Dependence on fossil fuel is also reflected in electricity production. Oil fuel, gas and coal
contributed 38.2%, 15% and 42% respectively of the total amount of fuel required by the
PLN electricity company in 2005.
The largest amount of fossil fuel produced in Indonesia is treated as an export commodity for
state income. In the period of 1990-2005 4.1 billion barrels of crude oil, 953 Million BOE of
refined oil, 4.8 billion BOE of gas in the form of LNG, and 767 million tons of coal were
shipped to other countries around the world. In 2006, oil and gas contributed 32.52 % the
state budget income.

The high level of Indonesia’s dependence of fossil fuels can be seen clearly both in domestic
levels of usage and the volume used to rake in foreign exchange. However, fossil fuels are all
non-renewable resources, so if exploited continuously over time, all reserves will be
exhausted. Based on data from the Department of Energy and mineral Resources (DESDM,
2006), Indonesia still has 23 years of oil reserves, 62 years of natural gas reserves, and 146
years of coal reserves. These figures have been calculated on the basis of current production
levels, with the assumption that no new reserves will be discovered.

As can be seen in Figure 4, Riau and East Kalimantan provinces are the two largest oil and
gas producing provinces with a higher GDP per capita than other regions. Even so, these are
the two provinces with the greatest drop in per capita income throughout the period of 2001-
2005 when other regions were experiencing improved per capita incomes. The decrease in the
volume of oil and gas product exports from those provinces was a factor in the slide of per
capita income there.

Even though it seems that quantitatively fossil fuel reserves are adequate for the coming
decades, if the energy demands are factored in, the reserves are relatively small. Figure 2.6
sets out a picture of the oil and gas and coal reserves position for several countries. The size
of reserves will shrink in terms of the population or fossil fuel production process from year
to year, and the opposite will be true if the population decreases or new reserves are found.
Without the discovery of significant reserves, and with the population projected to increase,
fossil fuel reserves will be limited for future generations. These conditions must be taken into
careful consideration by nations with limited fossil fuel reserves like Indonesia.

Even greater challenges emerge when the there is a great distance between the reserves
locations and the population centers. The new oil and gas and coal reserves are in Sumatra
and Kalimantan, while the center of economic activities is in Java. Indonesia’s policy of
massive exportation of fossil fuel over the past several decades is currently putting the pinch
on. The continuously increasing domestic demand is more and more difficult to fulfill
because of the long-term export contracts in effect and the strong buying power of the
international market.

Besides that, the failure to increase refinery capacity has caused the importation of refined oil
products to increase consistently to 30% of the total energy consumption segment in 2005 As
a result, the volatility of the oil market and the prices of refinery products continue to have a
major impact on Indonesia.

The various conditions set out above indicate a high level of dependence of fossil fuels to
meet the constantly increasing energy demands. This has led to an extremely fragile situation
in which disruptions of energy security are sure to emerge more and more frequently. This
vulnerability due to the lack of provision of adequate supplies of energy will hinder the
development process in both the short and long term, and in turn will disturb the security of
the nation.
From another point of view, Indonesia does have large potential renewable energy resources,
such as water, geo-thermal energy, solar energy, wind, and biomass resources. The
mountainous contours and forests of Indonesia’s islands ensure water resource potential in
many regions. As a nation located at the junction of three major plates of the earth’s crust,
namely the Pacific, India-Australian, and Eurasian Plates, Indonesia has vast geothermal
potential, particularly in Sumatra and Java. This archipelago is also set along the equator and
experiences sunshine all year long. The forests, plantations and orchards of this region also
hold great biomass potential. However, up to now the exploitation of that potential has been
very limited.
Source:
Compiled from
1. International Energy Outlook 2007, EIA (Energy Information Administration)
2. http://en.wikipedia.org/wiki/List_of_countries_by_population
3. Presentasi Menteri ESDM, 20 Juni 2007

Figure 6 Fossil Energy Reserves Per Capita

Non Sectoral Policy

Non sectoral policies, such as the regional autonomy, investment and fiscal policies, have
had a major influence on energy supplies. The shift toward regional autonomy from 2000
until now has resulted in the transfer of authority and responsibility from the central
government to local administrations. Even though the purpose is to make the bureaucracy
more efficient, and improve public accountability of regional administrations, the changes
made were not done in tandem with an upgrading of the capability of regional officials and
the setting into place of appropriate regulations. This has caused overlapping in permit
issuance at local administrative level.

This overlapping of land titles and work contracts in Indonesia is not conducive to a good
exploration climate for oil, gas and mining exploration. The production of oil and natural gas
has tended to stagnate and even decrease under the burden of taxation and exploration related
customs duties. The ongoing reformation in the financial sector has led to uncertainty in
relation to taxes and other charges imposed by both the central government and regional
administrations. Results of a survey conducted by PriceWaterhouseCoopers (PWC, 2006)
indicate that Indonesia is one of the countries with the highest royalty levels in the world at
61.8%. This is certain to influence investor decision making on whether or not to invest in
Indonesia.

The failure to respond to the need for investment in both upstream and downstream sectors
will threaten energy supplies and have a negative impact on the national economy. A
conducive investment climate is imperative to realizing sustainable energy management and
national energy security.

Infrastructure Limitations

One of the reasons for the uncertainty in energy supplies in Indonesia is the failure of the
development of support infrastructure, such as gas pipe networks, electricity transmission and
distribution networks, refineries, transportation facilities, and harbors, etc. to keep up with the
growth of the population and the increasing need for energy. For example, the limited
regeneration of aging power plants that makes electricity production less than optimal. Or the
lack of pipelines to distribute , which hinders the utilization of gas domestically.

Indonesia’s geographic conditions as an archipelagic nation constitute challenges to

achieving equal access to modern energy for all Indonesians. The expansion of access has
depended on the government until now. Even though both community and private sector
initiatives have been made, they remain isolated and uncoordinated. The Java-centered
development of energy infrastructure has resulted in difficulties in the exploitation of the
energy sources existing in all other parts of Indonesia. This has caused uneven economic
development nationwide. In addition, the existing concentrated development pattern will be
further constrained by lack of natural support capability in the regions.

World Supply and Demand Dynamics

Global supply and demand is not a static issue. Many factors influence energy supply and
demand to change, among them being geopolitical transformation, shifts in the energy
market, and changes in market orientation in response to global climate changes.
The geopolitical factor has a heavy influence on energy supply and demand worldwide. In the
period before 1989, the geopolitical energy map was based on ideologies and military power
employed to achieve global dominance. At this time, shifts in energy geopolitics are
occurring that make it difficult to know in which direction stability can be created. Certain
tendencies indicate that military power, political interests, economic potential and cultural
influences will become ever stronger factors in the future. APERC (2007) predicted a number
of alternative alliances that could emerge in the period after 2020. If it is assumed that the
United States will remain superior militarily and economically, then the newly strong nations
or national grouping of Europe, China, India and Russia will gather around the U.S. in a
“five on a dice” Formation. However, if the system of global strengths becomes divided, the
geopolitical energy map will be based on opportunistic ad-hoc alliances. The potential also
exists for alliances to emerge in Europe on the basis of the consideration that nations on that
continent share a binding cultural proximity. Another possibility is the formation of alliances
among newly powerful states based on their own global ambitions that could result in
”emerging powers”.

The kind of geopolitical transformation explained above, along with other factors, will have
an influence on the structure of energy supply and demand in the future. Several years ago,
the exportation of oil and gas was dominated by Middle Eastern states, with supplies being
sent to trans-Atlantic destinations. At that time, Russia, Central Asia, West Africa, and a part
of Latin America were little noticed hydrocarbon suppliers.

The growth of economies in Asia, particularly those of India and China, has changed the
structure of energy demand worldwide. This will result in widespread increased demand for
energy that will eventually lead to global strife over energy.

On the other hand, this reality provides a real opportunity for nations that have the capacity to
export. In the future, the energy market will be influenced by the bargaining position of
energy supplying nations as result of the energy demands of the nations whose economies are
growing drastically. Meanwhile the energy importing nations will have to negotiate
alternative price mechanisms with the supplying countries. It is strongly possible that these
changes will require the formulation of energy management strategies in order that
development can be sustained.

Environmental Factors and Natural Disasters

The management of the energy sector, including the adequacy and certainty of supplies,
cannot be separated from the issue of the environment. The supply and exploitation of energy
that remains dependent on fossil fuels has had a negative impact on the environment through
the large amount of greenhouse gas emissions, particularly CO2, which are produced through
the burning of fossil fuels. The cumulative affect on the environment by overall human
activity, including the provision and utilization of energy, can be seen in the global climate
change. A number of phenomena caused by this climate change are already being felt, among
them extreme weather conditions, such as powerful typhoons, droughts, and floods, as well as
the rising of seawater level, higher temperatures and others.

Indonesia’s geographical conditions as an archipelago spanning the equator make it

vulnerable to these climatic changes. The rising of the surface of the ocean as a result of
rising temperatures threatens small islands and the way of life on the larger islands in
Indonesia. The impact of global climate changes is expected to heavily influence ocean
transportation patterns, which could result in the disruption of distribution channels, and
eventually cause uncertainty in the conversion and provision of energy.

A number of major disasters have struck Indonesia in the past few years that have also
influenced energy supply uncertainty. For example, the earthquake in Padang that caused
huge waves in Indonesian waters that made it impossible for freighters hauling coal to dock
at several ports in Java, thus shutting down production at power plants due to the lack of coal
supplies. As well, the tsunami in Aceh at the end of 2004 damaged huge stretches of
infrastructure making it impossible to access energy in that region. In addition, the floods that
frequently sweep Jakarta result in the disruption of electricity distribution and damage to
PLN installations in various areas, causing blackouts. Prolonged dry seasons result in water
supply shortages at power stations that make power production less than optimal.

Increasing energy demands are starting to be felt as a serious problem that could threaten
Indonesia’s energy security if adequate energy supply reserves cannot be found. The
shortages of oil fuels and LPG, as well as the electricity blackouts occurring in all regions of
Indonesia, indicate uncertainty in the energy supply in relation to meeting domestic energy
demands. Efforts to increase reserves, to diversify energy sources, to facilitate the
management of development, as well as to improve the efficiency of utilization, will all take
a massive investment, the correct technology, and quality human resources that support
collaboration among myriad parties.

4. Price Management

The energy price policies and subsidies resorted to thus far constitute important factors
relating to the many problems in the pro vision and utilization of energy. The government has
been determining and setting the prices of oil fuels and electricity for quite some time now.
Up to now, the price of subsidized fuel and energy had always been set lower than the cost
for its provision due to the consideration that energy was a need that drove development
activities. A portion of the state budget has been routinely set aside to cover the gap between
the price of provision and the income from sales.

During the time when Indonesia was still an oil exporting nation to be reckoned with
internationally, this policy did not cause much of a problem because the income from oil and
gas exports were adequate enough to defray the costs of the energy subsidy. However, when
oil and gas production began to drop and imports of oil fuels began to increase, while the
prices for oil products on the international market have been rocketing or fluctuating wildly
recently, the continued implementation of the energy subsidy policy has become a major
struggle.

Besides the energy price policy set by the government, the world oil prices have been an
important factor in any discussion of energy management in Indonesia. Figure 7 shows that
overall the price of oil on the international market has tended to rise since 1998, although it
has decreased occasionally at certain times. On November 20, 2007 the prices of Brent crude
oil and WTI reached around US$ 99, breaking the psychological barrier in place in many
parties’ minds this decade,
The increased demand for fuel fed by imports and the fluctuations in world oil prices have
had a great influence on Indonesia’s economic conditions. In efforts to decrease the price gap
between domestic and international prices, the government has tried applying seven different
fuel price mechanisms since 1999, as can be seen in Table 2.1. However, none lasted long
due to vulnerability to the unexpected oil price fluctuations on the international market.

120

WTI Brent

100

80
US $ per Barrel

60

40

20

0
1/5/1998

9/12/1998

5/20/1999

1/25/2000

10/1/2000

6/8/2001

2/13/2002

10/21/2002

6/28/2003

3/4/2004

11/9/2004

7/17/2005

3/24/2006

11/29/2006

8/6/2007

4/12/2008
Source: Energy Information Admisistration, www.eia.doe.gov

Figure 7. Selected International Crude Price 1998-2007

Staring in April 2001 the government applied price differentiation for consumers, whereas
previously price differentiation had been done only for the various types of fuels. In January
2002, reference prices were set for fuel products, such as premium, kerosene, ADO, IDO &
MFO, on the Singapore market. In January 2003 prices were set, along with maximum and
minimum price caps in order to accommodate fluctuations in international oil prices. In
March 2005 fuel prices returned to a set price with the elimination of the maximum and
minimum price caps because prices had consistently risen internationally. Then, in October
2005, as world oil prices continued to soar, the government stopped regulating the cost of
fuel for both consumers and industry.

Figure 8 sets forth the changes in the prices of premium, diesel, and kerosene throughout the
period of 1999-2007, compared with the set Singapore market price. The struggle to adjust
fuel prices with this pattern in the face of the international oil market instability was clearly
an exhausting undertaking, which did not bring the expected results.

The unpredictably volatile oil price carried implications of market shocks for the managers of
the state budget. Figure 2.9 shows the portion of the state budget set aside for fuel subsidies.
The revisions to the budget set out in this graphic indicate the extent of change in economic
conditions both domestically and internationally that made it impossible to use the initial
assumptions. In 2006, the cost for subsidizing fuel prices reached Rp 63.68 trillion, with the
expectation that this would swell from Rp 55.6 trillion to Rp 87.7 trillion in 2007.
Meanwhile, domestic fuel consumption increased continuously, putting greater pressure on
the budget due to the direct correlation between the volumes that had to be supplied with
imports that were vulnerable to international price fluctuations.

Basically, this subsidy was necessary in order to protect the poor and vulnerable in society.
However, in reality, this energy price policy affected all consumers, meaning that it also
benefited parties that did not deserve the protection provided. Better positioned segments of
society actually benefited much more than the poor from the funds allocated for this subsidy.
In this way, the subsidy pattern missed the target and its core purpose was not achieved.

The subsidy made fuel prices so cheap that the wrong message was sent to consumers,
influencing their energy consumption patterns toward greater inefficiency. Besides that, the
apparently low fuel prices turned to actually be a constraint to the development of renewable
energy.

Table 1. Fuel Pricing 1999-2005

Presidential Decree
Fuel Type
10/1999 135/2000 73/2001 09/2002 90/2002 22/2005 55/2005
Signed Date 26-Jan-99 25-Sep-00 15-Jun-01 16-Jan-02 31-Dec-02 28-Feb-05 30-Sep-05
Effective Date 1-Feb-99 1-Oct-00 16-Jun-01 17-Jan-02 2-Jan-03 1-Mar-05 1-Oct-05
Gasoline √ √ √ * # √ √
Gasoline for industry √ √ X + # √ -
Kerosene for Household √ √ √ √ √ √ √
Kerosene for industry √ √ X + # √ -
ADO for transportation √ √ √ + # √ √
ADO for industry √ √ X + # √ -
IDO √ √ X + # √ -
MFO √ √ X + # # -
Sources: Compiled by IIEE
Notes : √ = fixed price * = Market with max/min cap
X = 50% of Market # = Fixed with max/min cap
+ = 75% of Market - = Not Regulated
 7000

Industry: fixed with max/min cap

Industry & Retail: fixed

Industry: 75% of market
Industry: 50% of market
6000

price
5000
Price (Rp/Lt)

4000

Industry: not regulated

3000

2000

1000

0
Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug-
01 01 01 02 02 02 03 03 03 04 04 04 05 05 05 06 06 06 07 07

Retail Industry Singapore Market Price (MOPS)

Gasoline Price

7,000
Industry & Retail:
Industry: 75% of market
Industry: 50% of market

Industry: fixed with max/min cap

fixed price

6,000

5,000
Price (Rp/Lt)

4,000
not regulated
Industry:

3,000

2000
2,000

1,000 700
600
400

-
Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug-
01 01 01 02 02 02 03 03 03 04 04 04 05 05 05 06 06 06 07 07

Retail Industry Singapore Market Price (MOPS)

Kerosene Price
 7,000

Retail: fixed
Industry &
Industry: fixed with max/min cap
Industry: 50% of market

Industry: 75% of market

6,000

Price (Rp/Lt) 5,000

4,000

Industry: not regulated

3,000

2,000

1,000

-
Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug-
01 01 01 02 02 02 03 03 03 04 04 04 05 05 05 06 06 06 07 07

Retail Industry Singapore Market Price (MOPS)*

ADO Price

Sources: Compiled by IIEE from various sources

Figure 8. Prices of ADO, Gasoline and Kerosene 1999-2007

Source: Ministry of Finance & the National Development Planning Body

Figure 9. Fuel Subsidies in the State Budget

The economic value of the energy prices was not well reflected in the uniform rates applied
for electricity and fuel in all regions of Indonesia. Figure 2.10 indicates the gap between
production costs and sales prices experienced by PLN in the various regions of Indonesia.
The dependence on oil fuels, including for the generation of electrical power, had strong
implications on electricity supplies in hard to reach areas. This kind of price policy did not
benefit the energy suppliers, and this caused uncertainty in energy supplies to isolated areas.

Sources: Electricity for All: Options for Increasing Access in Indonesia, the World Bank, 2005

Figure 2.10. PLN’s Revenues and Costs by Region 2004

Even though periodic efforts to reduce the subsidy and to adjust the price to actual economic
value had long been stipulated in the government’s policy documents, with a number of price
mechanism actually being applied, in practice all efforts at implementation were constrained
by the matter of the political stability of the government. The long standing mechanism for
setting fuel and electricity prices required a Presidential Decision as a legal basis and the
announcement of any such decree was always experienced as an earthshaking event. This
mechanism resulted in the price of energy always being linked to political issues, making it
an extremely sensitive matter. As a result, up until now, the energy (fuel and electricity) price
subsidy remains in place even though it is extremely difficult to manage, with the financial
burden alone expected to reach Rp. 131.7 trillion in 2007. This massive amount of funds
would constitute an extraordinary resource if it could be channeled into any number of other
programs, for example, the efforts to increase energy security through the empowerment of
local communities and funding for the development of renewable energy in line with the
potential existing in the various regions.

Besides the price subsidy, the adequacy of domestic energy supplies was influenced by the
difference in the domestic and international oil prices. The higher international oil prices as
compared to the lower prices domestically caused the market to orient toward export demand,
which resulted in the shortage of energy supplies to meet domestic needs. for example,
Indonesia, as the world’s second largest LNG supplier now has difficulty meeting its
domestic demand for the gas. Also in relation to the differences in international and domestic
energy prices, it turns out that the\e commitment to export LNG continues to constitute an
important component of the economic imperative to develop gas on a large scale in
Indonesia. This is also true of coal, with increases in production being primarily channeled to
the international market, while domestic demand is rising constantly. In current conditions in
which the price gap remains wide, the enforcement of a Domestic Market Obligation policy
for gas and export taxes on coal cannot be imposed arbitrarily.

References

Asia Pacific Energy Research Centre(APERC), Institute of Energy Economics Japan (IEEJ),
.2007. A Quest for Energy Security in The 21st Century, Tokyo, Japan.

Central Statistics Agency . 2006. Statistical Yearbook of Indonesia 2005/2006, Jakarta,

Indonesia

DMER. 2006. Handbook Statistik Ekonomi Energi Indonesia, Jakarta, Indonesia

Energy Information Administration. 2007. International Energy Outlook 2007, Washington

DC, US

Energy Information Administration, URL: www.eia.doe.gov

Energy Intensity of Selected Asian Countries, URL www.iea.org

Ministry of Finance & The National Development Planning Body,

Fuel Subsidy in the State Budget.

Laporan Keuangan Pemerintah Pusat. 2006. URL: www.perbendaharaan.go.id

List of Countries by Population, URL:

http://en.wikipedia.org/wiki/List_of_countries_by_population
MEMR. 2007. presentation materials, presented at SBM_ITB

PLN .2005. PLN Statistics, Jakarta Indonesia