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JAKARTA (TheInsiderStories) – The global oil price has been picking up to above the government’s assumption set in the state budget, prompting speculation that the government would raise domestic retail fuel price.

However, Minister for Energy and Mineral Resources Minister Ignasius Jonan announced on Wednesday that the government will not raise the fuel price until end of first quarter 2018.

Throughout this year, he continued, world oil prices have been hovering in a range of US$50 per barrel, or higher than last year, when it sold at $38 per barrel. The oil price is above the government’s oil price target set in the 2017 Revised State Budget of $46 per barrel.

On Tuesday (26/12), the international benchmark Brent crude stood at $67.06, a new high since May 2015. Meanwhile, U.S West Texaz Intermediated Crude futures jumped $1.50, or 2.6 per cent, to $59.97, the best level since June 25, 2015.

The Indonesian Crude Price (CPI) is set at $48 per barrel in the 2018 State Budget, far lower than the current oil price. From macroeconomic perspective, since fuel is an administered price commodity, the decision will help the government in keeping inflation rate at a low level.

However, the decision to hold the retail fuel price at the current level could be at the expense of state-owned energy company PT Pertamina and electricity firm PT Perusahaan Listrik Negara (PLN).

Minister Jonan argues that the decision to keep the fuel and electricity tariff is intended to boost consumers’ purchasing power and aims to achieve economic growth of 5.4 per cent next year.

“Therefore, we have decided to hold current fuel and electricity prices,” said Jonan on Dec. 27.

Jonan called on the state-owned electric company PLN and Pertamina to operate more efficiently, eventually enabling lower prices. For example, he suggested the company adjust and lower its maintenance costs for transmission and distribution lines.

President Director of Pertamina Elia Massa Manik said that the company is still calculating the impact of the current decision on the company’s financial condition amid a rising crude oil price trend.

“In fact, in September 2017 alone we still managed to earn $1.9 billion – or nearly $ 2 billion,” he said.

Oil Price Hike: the World’s New Challenge

After falling for two years from end-2014 and even slipping below $30 per barrel in early 2016, world oil prices have climbed in the past year and are currently at around $57 (WTI Crude Oil). Such a price recovery cannot be separated from the agreement of oil-producing countries in November 2016 to cut production and exports by 1.8 million barrels per day.

The low oil price environment has enabled the Joko Widodo government to maintain fuel prices and cut fuel and electricity subsidy by as much as hundreds of trillion rupiah per annum and shifted the subsidy funds to the infrastructure sector.

Cuts in production and exports are expected to extend through the first quarter of next year, allowing world oil prices to recover, which had previously peaked at around $100 per barrel.

The low world oil price has exerted a negative impact, not only on the oil and gas industry but also on the performance of certain oil-producing countries and regions, even though the market enjoys cheaper fuel prices.

Thus, the average oil price in 2018 is expected to continue to rise. In addition to pruning, other factors that tend to boost prices are growing oil consumption in the USA, Europe, China and India.

“World crude oil consumption will grow from 1.4 to 1.5 million bpd in 2017/18,’ surmised Suvro Sarkar, Pei Hwa Ho, Glenn Ng, William Simadiputra and Janice Chua in a DBS Group Research Regional Industry Focus Report.

According to the DBS research team, taking into account the increase in crude oil demand in 2017, next year the world oil price is estimated to rise to a level of $60-65 per barrel. Such a prediction is certainly encouraging for the oil and gas industry and oil-producing countries, but not so much for Indonesia, which in recent years has become a net importer.

The increase in world oil prices will certainly exert a direct impact on the growth of our national gross domestic product.

Nevertheless, the DBS research team said the increase in crude oil prices will have a positive impact on the Indonesian government budget, as tax and non-tax revenues from the oil & gas sector are estimated at Rp113 trillion or 10 per cent higher than the 2018 energy subsidy.

However, the rise in world oil prices, which could trigger a rise in fuel prices, will push prices of staples upward, as a result of high production costs, even though the Indonesian government may not increase the price of fuel to maintain operational costs. However, policies to keep fuel prices down should consider the availability of budgets for subsidies.

The increase in fuel does have a domino effect, which encourages the rise in prices of basic commodities and other services, and leads to higher inflation. By using the Consumer Price Index (CPI)– an indicator of a country’s rate of inflation, the transportation and electricity sectors in Indonesia become the main contributors, determining 25 per cent of all existing CPI categories.

Therefore, DBS predicts that every 10 per cent increase in world crude oil prices will have a 0.6 per cent impact on inflation.

This condition is clearly a challenge for the government amid efforts to boost economic growth and enhance competitiveness to encourage investment. Therefore, inflation is an important element that affects the investment rating of a country.

However, subsidies to maintain fuel prices and suppress inflation must also be thoroughly considered – not only the availability of a budget, but also the impact of renewable energy development efforts.

It is clear that under the current high oil price environment, raising or keeping the oil retail price and electricity tariff would have benefits and costs for the government. If the fuel and electricity prices are maintained, the government would be able to guard the inflation at a low level. However, that could be at the cost of Pertamina and PLN. If the price is raised, that could hit hard the consumer’s purchase power.

Written by Elisa Valenta, email: elisa.valenta@theinsiderstories.com

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