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.