Economist Urges Government to Mitigate Energy Inflation Risk from Middle East Conflict
Jakarta — Economist and Founder of Core Indonesia Hendri Saparini has urged the government to prepare several scenario options to mitigate the risk of energy inflation resulting from the escalating conflict between Iran and the United States-Israel alliance.
The conflict has triggered concerns about oil supply following the potential closure of the Strait of Hormuz, a strategic global energy trade corridor.
“If we do not develop an anticipatory strategy and only tinker with monetary or fiscal measures without concrete steps to address these price increases, I believe it will be difficult,” said the economist, commonly known as Rini, when interviewed in Jakarta on Monday.
He cautioned that without a clear grand design or overarching strategy, the management and coordination of the conflict’s impacts would lack direction. This is because those facing the situation extend beyond the government to include businesses and other stakeholders.
Should the conflict end quickly and distribution routes return to normal, the impact on oil prices is estimated to be modest. In other words, the duration of the conflict is the primary determining factor.
The second factor is the scope and scale of the war’s escalation. If the conflict widens and involves more parties or countries, pressure on oil prices will increase significantly.
Rini noted that in such a scenario, prices risk remaining elevated and difficult to lower as the impact spreads to more countries.
Furthermore, Rini predicts the impact could extend to various other commodities potentially driven by imported inflation.
In this regard, he explained, increased energy prices will almost certainly drive up transportation costs. Additionally, pressure on the exchange rate could also increase.
On the other hand, according to Rini, growing food import dependency without corresponding strengthening of domestic production substitution will amplify the economic impact.
Regarding the potential deviation of economic growth from the government’s target, he assessed that a prolonged geopolitical conflict poses a significant risk to Indonesia’s economic performance.
Before any trade agreement between Indonesia and the US and before the escalation of attacks in the Middle East, Core Indonesia estimated economic growth at 4.9-5 per cent, below the budget target.
Given uncertain geopolitical and geo-economic conditions and unclear government policy direction, he assessed the risk of slowdown will be substantially greater.
Previously, Coordinating Minister for Economic Affairs Airlangga Hartarto stated that conflict between the US and Iran could trigger increased domestic fuel prices.
According to him, price pressure could still be contained because US oil supplies have increased and the Organisation of the Petroleum Exporting Countries (OPEC) is expanding production capacity.
The government has developed contingencies for potential supply disruptions from the Middle East following the conclusion of a memorandum of understanding (MoU) to obtain oil supply from outside the region. This includes PT Pertamina’s (Persero) partnership with several US-based energy companies.