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Public Finance:
by Rocky G.H. (086i407i)

Contents

Present World Oil Fact

2
3 4

Defining a Subsidy

Fuel Subsidy in Indonesia

Conclusions

Quiz
Which country is the biggest world oil consumer?
The United State of America: 3.28 Bill. liter per day or about 11 liter per capita per day. In contrast, on average, it was about 5 liter per capita per year in the world (2007).

Which country is the biggest world oil producer?

Saudi Arabia: 1.63 Bill. liter per day. We need two Saudi Arabia production to fulfill the USA consumption (2007).

How much is the cheapest gasoline price?

2 US cent = 2 yen per liter in Venezuela (Nov. 2008).

Source: IEA and GTZ

Present World Oil Fact

Total Consumption of Petroleum Products, 2007

China 8.81%

Japan 5.83%

Germany Russia 3.28%India 2.86% Brazil 2.79% 3.26%

United States 24.08%

Others: 49.09% (Indonesia: 1.37%)

Source: The International Energy Agency (IEA)

Present World Oil Fact

Total Production of Petroleum Products, 2007

United States 9.94% Russia 11.45% Saudi Arabia 12.61%

Iran 4.85%

China Canada 4.65% 3.92%

Mexico 3.73%

United Arab Emirates 3.56% Kuwait 3.21% Venezuela 3.09%

Others: 38.97% (Indonesia : 1.23%)

Source: The International Energy Agency (IEA)

Present World Oil Fact

Retail gasoline price and GDP per capita (PPP), 2008
160 Japan, 142 Brazil, 126 Singapore, 107 China, 99

140 Retail Gasoline Price (US Cent) Nov. 2008

Mongolia, 138 Uganda, 130

120 India, 109 Cambodia, 94 Laos, 92 80 Vietnam, 80 USA, 56

100

60

40

Indonesia, 50

20 Venezuela , 2

Saudi Arabia , 16

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

GDP per capita (PPP), US$

Source: IMF and GTZ

Present World Oil Fact

Retail gasoline price and CO2 emissions, 2006
120

100

Uganda, 101

Retail Gasoline Price (US Cent)

Mongolia, 87
80 Cambodia, 78 Laos, 73 60 Vietnam, 53 40

Japan, 90 Brazil, 84

China, 61

Indonesia, 44

20

0 0 200 400 600 800 1,000 1,200 CO2 Emissions from the Consumption of Petroleum (Million Metric Tons)

Source: IEA and GTZ

Present World Oil Fact

Correlation between retail gasoline price and CO2 emissions from the consumption of petroleum, 2006
2500 500 0
0

1000 CO2 1500

2000

50

100 gasoline

150

200

Source: IEA and GTZ, calculated

Defining a Subsidy
According to IEA,
An energy subsidy is any government action that concerns primarily the energy sector and that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers.
p

D*
D

p2 p0 p1

a d

b c e

s per unit of output is paid from the public treasury, increases the demand curve by a vertical distance of s, the equilibrium shifts from price p0 and quantity q0 to price p1 and quantity q2, the effective producer price is thus p2, producers gain area a + b , consumers gain area d + e , government pays (p2 p1) * q2 in subsidy payments, which represents a loss of area a + b + c + d + e to taxpayers, Thus subsidy leads to a net welfare loss of area c.

q0

q1

Source: IEA and The Welfare Economics of Public Policy

Defining a Subsidy
Advantage of fuel subsidies:

protect indigenous energy industries from foreign competition, reduce deforestation*.

Disadvantage of fuel subsidies:

distort markets, encourage higher energy consumption, harm the environment, costly and open to abuse

Fuel Subsidy in Indonesia

Recently, 12% of world population have enjoyed fuel subsidies that are given by 24 oil rich countries. The Indonesian government has subsidized the energy demands: fuels and electricity, starting in 1967.

At presents, fuel subsidies are applied to five regulated oil products: gasoline, automotive diesel oil, industrial fuel oil, kerosene, and heavy fuel oil.

Since 2004, Indonesia become a net-oil-importing country

Source: IEA and Ministry of Finance

Fuel Subsidy in Indonesia

In 2005, the Indonesian government faced difficulty in maintaining subsidized domestic fuel prices:
The increase of world oil prices; as one of the effects of the rapid economic growth of China and India,

The decrease of Indonesian oil production; old oil well and lack of investment,

The increase of domestic fuel demand; economic growth and cheaper fuel prices.

Fuel Subsidy in Indonesia

The increasing of amount of vehicles, 1991 2005 Million Units 60
Trucks Bus Mortorcycle Cars

50
40 30 20

10
0 1991 1993 1995 1997 1999 2001 2003 2005

Source: Ministry of Transportation

Fuel Subsidy in Indonesia

The Central Government Expenditure, 2004

Transfers to regions 29%

Other spending 10%

9 Bill.
Fuel subsidy 13%

Subsidies 24% Interest 10% Capital 9% Material 5%

Source: Ministry of Finance

Electricity subsidy 6% Other subsidies 5%

Personnel 13%

Fuel Subsidy in Indonesia

In year 2005, the government increased fuel prices 2 times

Total increase: 149% for gasoline, 186% for kerosene and 161% for automotive diesel At that time, for gasoline, kerosene and automotive diesel were 68%, 31% and 68% of international prices, respectively
has had a dramatic short-term impact on living standards.

the impacts: y-o-y inflation Oct. 2005 = 17.89%

Fuel Subsidy in Indonesia

Retail gasoline price and CPI
170 160 5000 IDR 4,500 4500 4000 3500 3000 2500 IDR 2,400 IDR 1,810 2000 1500

Figure 7: Retail gasoline price and CPI

Consumer Price Index

150 140 130 120 110 100

General Clothing

Cereals Other Non-Foods

Other Foods Premium (RHS)

Housing

Retail Gasoline Price

Fuel Subsidy in Indonesia

Figure 8: Distribution of fuel consumptions by recipient
50%

Figure 9: Welfare Change from Sept. 2005 to March 2006

5.00% 4.90%

40%

4.80% Welfare Change

1 2 3 4 5 6 7 8 Household consumption decile 9 10 Rich

4.70% 4.60% 4.50% 4.40% 4.30% 4.20%

30%

20%

10%

0% Poor

4.10% 4.00% Deciles 1 2 3 4 5 6 7 8 9 10

Sources: SUSENAS 2007 and World Bank staff estimates

Source: World Bank, 2006

Source: The author estimation

Fuel Subsidy in Indonesia

The Reform steps:
Phase 1 Phase 2 Phase 3

Fuel Subsidy in Indonesia

From Oct. to Dec. 2005, it was estimated that the budgetary saving was about $2.5 billion. About 20% of that was allocated to the cash transfer program,

starting in Oct 2005, via post office, 3,000 yen per quarter per household , 15.5 million poor HHs (over 60 million people covered).

Transform the use of cooking, from kerosene to LPG to reduce kerosene subsidy

target period 2007 2011. In 2008, it saved $0.5 bill.

Source: IEA and Ministry of Finance

Conclusions
A subsidy economically is a loss

Not efficient and it sometimes goes to a wrong target

Reducing fuel subsidies drastically became a trigger of the high inflation

reduce welfare high cost

Money transfer: a fish not a fishing rod Oil contract reform and other minerals.

Reference
Deutsche Gesellschaft fr Technische Zusammenarbeit (GTZ) (2009). GTZ International Fuel Prices, 6th Edition. Germany. http://www.gtz.de/ en/themen/umwelt-infrastruktur/transport/10285.htm IEA (2009), World Energy Outlook, Looking at Energy Subsidies: Getting the Prices Right, OECD/IEA, Paris. http://www.eia.doe.gov/oil_gas/ petroleum/info_glance/petroleum.html

Just, R. E., Hueth, D. L., and Schmitz, A. (2006). The Welfare Economics of Public Policy: A Parctical Approach to Project and Policy Evaluation. Worth Publishers, New York.
_______Ministry of Finance. http://www.fiskal.depkeu.go.id/ENG/link.asp? link=1060000

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