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Many people probably ask the same question nowadays, “with the crude oil price falls below USD 70/bbl, should the (subsidized) fuel price falls too?”

I am not going to talk about the impact of the rise and fall of world crude oil price to unsubsidized fuel, which already set the price at the market price. The price of these type of fuel and probably including the industrial fuel oils and diesel, reviewed fortnightly and adjusted accordingly based on MOPS.

A different story for subsidized fuel (premium (RON 88) and transportation diesel fuel), which prices are sets at certain figures. The price doesn’t follow any market mechanism, because the government carries the burden of making up the price to it’s market price. For example, if the RON 88 market price is at IDR 8000/ltr and Pertamina (as sole agent of the subsidized fuels) sells at a retail price of IDR 6000/ltr, government must pay the Rp 2000/ltr gaps, and that’s what people called subsidy.

I am one of those people who oppose subsidy on fuel. Why?

Cheap price = take for granted

Americans are known for their passion about big cars, trucks, SUVs and all those high octane consuming vehicle. With low oil price, the population and sales of these types of vehicle continue to rise. When oil price spikes and hit a record high of US$ 147/barrels, the fuel price also rises, and definitely will hit hard people using this type of vehicle as their mean of transportation. The sales then goes down, manufacturers of compact cars, high mileage but low fuel consumption cars (predominantly Japanese cars) are on the rise. People left their SUVs and those high fuel consumption cars in their garage. Some even take it to more extreme measures, walk or bike or take public transportation. As results, cut costs, and greener environment.

Indonesian enjoys low fuel price due to subsidy for decades. And what does this lead to? A rapid growth of vehicle which I personally think beyond reasonable. Even though not gas drunk vehicle, but still the numbers of vehicle keep on increasing year after year without significant addition of road lengths, especially in big cities, where the road always packed with cars and other vehicles during rush hours. In the end traffic jams, and pretty much wasting of fuel.

Its not about the subsidy in this matter, but how we behave towards our energy use. With low fuel price, we tend to take it for granted. Use our energy inefficiently, without give a little care that oil is not a renewable resource. Sure there is research on alternative fuel, but do you really wish to compete for grain with your cars?

Fuel Delivery and Distribution

In the term of delivery and distribution, Indonesia poses a different challenge, PERTAMINA as sole distributor of subsidized fuel must be able to keep the price at the same level from end to end of Indonesia, which consists more than 17000 islands, big and small. How do you do that?

Unlike fast moving consumer goods which can freely traded at whatever price based on supply and demand and avaialability. For example, the price of rice in Java may be lower than Papua, because Java is the centre of rice production, and the cost for delivery in Java is far less than the cost to deliver it to Papua. For fuel, the price must be the same no matter where you are as long as you buy it from the gas station, it must be the same, at the price sets by the government. This makes the mathematics a bit complicated, not only supply and demand. By following the supply and demand rule, the price in Java must be far lower than those in Jayapura, since the consumer are mostly in Java and most of the refineries also in Java, cost of transport also low. Since the rule says that the price must be the same no matter where you are, then the price must be adjusted to cover all the expenses for transport and all.

Indonesia is no longer oil exporting country. Sad but true, Indonesia indeed still producing oils, but the production is less than the consumption. To cover the needs of oil consumption, we imported oil from other countries like Arab states for crude oil. Not many people understands, that not all part of oil can be converted to fuel, only half of it. To get a liter of fuel, needs approximately 2 liters of crude.

Is subsidy really a solution?

The purpose of fuel subsidy is to help those with low buying power to be able to buy the fuel. But is that really what happens?

When oil price at its record high, the unsubsidized fuel which sets at its market price almost double the price of subsidized fuel. More and more people buy the subsidized fuel, increase the consumption which leads to increase of subsidy. Even those people with expensive and lux cars turn their pockets to 88 octane fuel. In the view of economics, it really is make sense, I don’t blame those people. Why would I buy something more expensive for the same use?

The problem is the subsidy misses its targets, the low income people. The logic is this, if you can afford to buy cars, then you must afford to pay for the fuel. With more and more cars, more consumption and therefore more subsidy drawn out from the National Budget.What about those which are still using kerosene for cooking?

Tell them not to waste more energy by using aviation fuel for making your lunches and dinners. Kerosene is the based for aviation fuel, namely Jet Fuel A/A1. Why would you use it for boiling waters and cooking rice? Kerosene to LPG conversion program should be an appropriate solution, cleaner, saver and more energy efficient compared to kerosene. But some people remain skeptical about this program. More over in some cases the LPG container explode which causes fear amongst those with lower education.

But now the oil price went on landslide below US$ 70/barrels, that means we have spare budget on the subsidy, why can’t we make it lower?

It is clear that subsidy does not bring positve impact to those who need it. Their buying power never increases by giving subsidy on fuel. In the transportation sector, especially public transport, which the fare has been adjusted due to the last fuel price hike, the fare is highly unlikely become lower if the fuel price lowered. In the longer term, this fuel subsidy will always distort the national budget.

Can we just stop giving away “fishes”? And instead of giving away fish, we can give them the tools to catch more fish. It would be much better if the alocated budget for fuel subsidy can be used in some other sectors, like education, giving more chances for the poor to go to school, free schooling and better salary for teachers, better facilities for the school. Or health care, hospitals, doctors, nurses, those trillions of rupiah wasted each year and burnt in the tail pipe of every vehicle will worth more in the future.

Just my two cents, feel free to share your thought…


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