Why Energy Subsidies Matter
    Category: Energy Booster By : Rainer Michael Preis Read : 566 Date : Tuesday, September 13, 2016 - 05:31:04

    For energy industry participants it might be ironic that the so-called “Dutch disease” could not have been a problem for Indonesia, as the nation had a bit of Dutch history among it vast natural resource blessings. Indonesia exports copper, palm oil and other raw materials but is a net importer of oil despite being the only Asian country that has been an OPEC member not just once but twice. 

    Indonesia has had a peculiar relationship with fuel subsides, oil and OPEC over the years. Indonesia left the oil cartel in 2008 only to rejoin this year. Indonesia has regained its status as the only Asian member of OPEC and the only member that is a net importer of petroleum and other liquids. Indonesia’s decision to suspend its OPEC membership during the global financial crisis was prompted by the collapse of oil prices in 2008 and the growing internal demand (some of it politically motivated) for energy, declining crude oil and condensate production in mature fields, and limited investment to increase production capacity. 

    From 2004 onwards, domestic oil demand started to exceeded production as the industry suffered from underinvestment. The Energy and Mineral Resources Ministry is forecasting an oil production target of 740,000 to 760,000 barrels of oil per day (bopd) in 2017, representing a decline of about 9% from the 830,000 bopd targeted in the 2016 state budget.

    The drop in oil production next year is due to a combination of aging fields and slow exploration. Indonesia currently buys crude oil and petroleum products through third parties or traders and now wants direct access to long-term crude oil supply contracts through negotiations made between the national oil companies of OPEC members.

    The Joko “Jokowi” Widodo government increasingly seems to realize the negative effect of fuel subsidies and the fact that it hinders the development of an efficient local energy sector. Energy sources that would otherwise be attractive are not developed because the pricing mechanism in the market is distorted. The scale of Indonesia’s fuel subsidies is well known—about $30 billion each year. What might be well less known or appreciated is the fact that fuel subsidies exceed government spending on healthcare and education combined.

    President Jokowi pushed for reforms only after the severe commodity bear market exerted itself on the country and oil prices collapsed from over $110 to trade below $30 in the first quarter of this year. The proverbial “bad times make for good policy” however could play out well under “Jokowinomics.” 

    The government cut energy subsidies and tried to attract more investment into manufacturing and oil industry infrastructure. Indonesia’s population is young and growing but according to some estimates the population might peak and start aging around 2025, so the challenge for Indonesia is to get rich before it gets old. Unleashing the true potential of Indonesia’s energy sector by finding the political will to reduce energy subsidies is one way to create a richer country and better future for all its citizens