Breaking oil monopoly

Breaking oil monopoly

Initial reactions to the oil and natural gas industry bill,
which will, among other things, abolish state-owned Pertamina's
monopoly of domestic oil fuel sales, seem to be a cautious
endorsement. The bill, currently being finalized by the Ministry
of Mines and Energy, is scheduled to be proposed to the House of
Representatives later this year, to replace Law No.8/1971, which
granted Pertamina the monopoly of oil refining and domestic sales
of oil products.

The first point of argument against an abolition of the
state's monopoly in the near future, is the fear that a free
market mechanism will hurt the common people, because fuel prices
will surely increase. For example, former oil minister Subroto,
while agreeing in principle to the idea of a free oil fuel
market, still sees it as imperative for the government to first
precondition the people to the new mechanism.

Mohammad Sadli, another former oil minister, shared Subroto's
view about the need to eventually free the oil fuel market. Sadli
cautioned the government against possible oligopolistic
practices, as those in the cement industry, because only three or
four conglomerates have the resources to enter the oil refining
industry and set up nation-wide oil distribution networks. He
considered it necessary for the government, or Pertamina, to
continue to play the role of a price leader, who enforces a
benchmark price in the market.

The main, underlying reasons for abolishing the state monopoly
are the annual 5 percent to 6 percent increase in fuel
consumption, the severely limited capacity of the public sector
to finance new refineries and an urgent need for improving
efficiency in the oil refining industry and in the use of fuels.

Higher efficiency in the oil refining industry can only be
achieved by unleashing competition in the industry, which means
abolishing Pertamina's monopoly. Wasteful use of fuels can only
be minimized by pricing oil fuels according to free market
forces. Allowing free market forces to determine the prices of
oil products, in a gradual manner, is now vital as the country
has become increasingly dependent on imported crude oil and oil
fuels.

True, oil fuels are a strategic commodity and should be
controlled by the government. Control can be exercised through
other means and not necessarily through a monopoly. The plan to
liberalize the oil fuel market should not be seen as contrary to
Article 33 of the Constitution, which stipulates that land, water
and other resources contained in the earth should be controlled
by the state and should be used for the greatest benefit of the
people.

The government has privatized the telecommunications service,
power generation, drinking water and even the collection of
certain taxes and levies. The results are better services and
products at reasonable prices. Of most importance to the
government is the setting up of a mechanism to ensure fair
competition and prevent private monopolies and oligopolistic
practices.

Indonesia's petroleum industry, as economist Hadi Soesastro
and PT Caltex Pacific's Chairman Haroen Al Rasjid have said, can
only be sustained by the continuous discovery of new oil
reserves, which, in turn, require continuous explorations.
Explorations need big investments. Investors are only willing to
put their capital at stake in a conducive business climate.
Monopoly is the number one enemy of private investors.

There is another fundamental factor that makes the oil
refinery and oil products marketing monopoly detrimental to the
sustainability of the hydrocarbon industry. Crude oil discovered
by explorations has no intrinsic value. The crude stream is
valuable only in relation to the value of the products which can
be extracted from it. Hence, the condition of the refinery
industry and the market of oil products is crucial for attracting
investors to the upstream oil industry (oil exploration and
development).

The most crucial element in freeing the oil fuel market is a
mechanism to ensure that the prices of oil products are almost
the same all over Indonesia. At present, prices are the same
across the country, but at the expense of the state budget. Here,
we think, lies the pivotal role of Pertamina as the price leader,
to enforce benchmark prices for the various oil products.