Oil Price Spike Poses a Dilemma for Indonesia

Presiden Joko Widodo (Jokowi) at 42nd Indonesian Petroleum Association Convention & Exhibition - Photo by IPA

JAKARTA (TheInsiderStories)– Rising oil price will bring positive impact to the oil and gas investment and higher state revenue, but on the other hand, it could increase subsidy spending.

International oil prices surged into the highest level since November 2014, driven by concerns over a shortage risk in Venezuela production due to the presidential election and the expectation of US sanction against Iran.

The US reinforced his attitude towards Iran by making a list of demands to Iran. The move is seen to affect oil export from the country and trigger rising prices.

The fears of US sanction against Iran have also boosted oil price in recent weeks. The US on Monday (21/05) demanded Iran make major changes from stopping its nuclear program and withdraw from the Syrian civil war. It potentially reduces Iranian oil exports by 200,000 barrels per day in the fourth quarter.

Brent crude futures contract is now at US$79.39 per barrel, up US$17 cents or 0.2 per cent from the previous close. Brent reached US$80 per barrel for the first time since November 2014 last week. Meanwhile, West Texas Intermediate (WTI) traded at US$72.47 per barrel, up US$23 cents or 0.3 per cent.

Venezuelan socialist President Nicolas Maduro faced international criticism after being re-elected last week. The US is considering oil sanctions against Venezuela, where output dropped by a third in two years to its lowest in decades.

Rising oil price may bring positive impact to Indonesia. The rising prices of oil have pushed up the economics of oil and gas projects in Indonesia, making investments in the upstream oil and gas sector–exploitations and explorations, more feasible and attractive.

Indonesia has become net oil importer since 2004 as consumption exceeds production. Indonesia’s oil production only reached 784.581 barrel per day by 20 April 2018, while domestic consumption was more than 1,628,000 barrel per day.

The low oil price trend since 2014 also push back the oil and gas investment in Indonesia. Based on data from the Upstream Oil and Gas Regulatory Special Task Force, the investments for exploitations and explorations during January-April 2018 reached US$3.18 billion or around Rp44.7 trillion. During January-March alone the investments amounted to US$2.40 billion, as compared to only US$1.9 billion at the same period last year.

The realized investments, however, were still below target, which was set at 22 percent of the total US$14.2 billion in the work plan and budget (WP&B) of contractors.

In addition, the oil price rising also potentially raise state revenue from oil and gas. The government set an oil price assumption of US$48 per barrel on the 2018 state budget, far below current price level.

Finance Minister Sri Mulyani earlier calculated an increase by US$1 per barrel in oil price could raise state revenue by Rp1.1 trillion. With the current price of US$80 per barrel, Indonesia is highly likely to surpass the current oil & gas revenue target of Rp83.5 trillion. It consists of Rp80.3 trillion tax revenue and Rp3.2 trillion of non-tax revenue.

However, the oil price rise also brings negative effect to the state budget due to the increase in subsidy budget. It does not only affect the fuel subsidy but also the electricity as many power plants generated by fuel and LPG subsidy as the oil price usually affects LPG price. The government set Rp46.3 trillion in fuel subsidy in 2018 state budget, of which Rp7.8 trillion is for diesel subsidy.

If the government opts to maintain subsidy spending and raise fuel price instead, then it will bring a domino effect to inflation and will further undermine the people’s purchasing power that is already low.

Based on data from the Central Statistics Agency, the growth of household consumption that reflects people’s purchasing power was recorded only at 4.95 per cent in the first quarter of 2018, which was almost stagnant if compared to consumption rate in the first quarter last year at 4.94 percent.

Furthermore, the shortage in subsidies could hurt the two state-owned energy companies PT Perusahaan Listrik Negara and PT Pertamina. Pertamina on March 2018 calculated a potential loss of Rp3.9 trillion due to oil price hikes.

The government has little room to increase subsidy spending, considering the budget deficit has reached Rp55 trillion by April 30, 2018. The government collected revenues of Rp527.8 trillion or 27.9 per cent of the state budget target of Rp1,894.7 trillion. Meanwhile, the state expenditure has reached Rp582.9 trillion or 26.3 per cent of the target of Rp2,220.7 trillion.

However, the government has no choice but to increase subsidy as President Joko Widodo needs a populist policy to win 2019 presidential election. The fuel price hikes often to be ammunition for the opposition to attack the ruling government.

The Coordinating Minister for Economics Affairs Darmin Nasution earlier planned to increase subsidy spending in the state budget by Rp10 trillion. This figure could be bigger as the oil price continue to rise.

The government should bring other options to overcome the oil price without victimizing the poor people. One option is boosting the tax revenue as Indonesia’s tax ratio 10.8 per cent of GDP, extremely low compared to the regional peers in Southeast Asia.

Email: fauzulmuna@theinsiderstories.com