Energy Subsidies Potentially Swell to Rp280 Trillion Due to Oil Price Surge

Global oil price surges resulting from geopolitical conflict have the potential to significantly increase pressure on Indonesia’s state budget (APBN). Under the worst-case scenario, the burden of energy subsidies could balloon to nearly Rp280 trillion.

M. Rizal Taufikurahman, Head of the Macroeconomics and Finance Centre at the Institute for Development of Economics and Finance (Indef), believes that the longer the conflict between the United States, Israel, and Iran persists, the greater the pressure on Indonesia’s APBN will become.

“The longer the conflict intensity worsens, the more our APBN will have to spend money on domestic needs,” he stated during an online public discussion titled “Turbulent Geopolitics, Volatile Oil Prices” on Sunday (15 March).

Rizal explained that without anticipatory policy measures from the government, the burden of energy subsidies under almost all scenarios will increase sharply. Under a mild scenario, Indonesia’s government energy subsidies could swell to Rp215.3 trillion.

He outlined how geopolitical turmoil affects the Indonesian economy through several transmission channels. First, surging import energy prices. Second, weakening logistics and distribution sectors that can cause supply disruptions. These conditions could ultimately suppress investment and trigger cost-push inflation.

According to Indef’s calculations, each additional US$1 per barrel of oil translates to an additional energy subsidy burden of Rp2.54 trillion.

“If there is a surge of US$10 per barrel of oil, it will eliminate more than Rp25 trillion of fiscal space and further narrow the APBN,” Rizal explained.

However, without anticipatory measures, the fiscal burden that the government must bear will be considerably larger.

“If no anticipatory policy is implemented, then it becomes even larger. So for every US$1 per barrel increase, the subsidy burden will increase further to Rp5.3 trillion,” he said.

For this reason, Rizal believes the government must urgently prepare anticipatory policies to prevent geopolitical conflict from shaking the domestic economy. He proposes two main policies that the government can implement.

The first is a reduction in fuel excise taxes, so that part of the energy price increase can be borne by the government. The second is ensuring that the impact of rising energy prices is not entirely passed on to society.

“If it is passed on to the public, I believe that in the current economic situation and given the public’s purchasing power, that is the heaviest option for our economy,” he stated.

He added that a policy of raising fuel prices has the potential to trigger higher inflation. Even in February, inflation was already recorded above 4%. This condition risks disrupting economic stability at both the micro and macro levels, which could ultimately impact social stability.

Another anticipatory step the government must prepare is to design cash transfer schemes and fiscal subsidies to mitigate the impact of external shocks on public purchasing power.

Rizal believes this policy is important to maintain, especially given the fiscal condition that currently records a deficit of around 2.92%.

“That is what I believe must be safeguarded. The deficit is now at 2.92%, and there will certainly be additional subsidies, especially energy subsidies, including the total subsidy impact,” he stated.

According to him, such interventions must be carefully designed so that pressure from external factors does not directly hit public purchasing power.

Rizal emphasised that public purchasing power must be maintained because household consumption is the main pillar of the national economy. He noted that consumption’s contribution to gross domestic product (GDP) reaches approximately 53%.

“These two anticipatory policies are what can be considered,” he said.

Based on simulations conducted, without anticipatory policies, Indonesia’s GDP growth could decline by up to 0.12%. However, if both policies are implemented simultaneously, their impact on GDP is relatively smaller.

“So if, for example, there are no anticipatory measures, no two policies working together, then our GDP will fall by 0.12%. This means it would be quite heavy for Indonesia to allow or accept without active anticipatory policies,” he stated.

He explained that if shock-dampening policies are implemented, the short-term impact on GDP is only around 0.02% in the first one to two months. Even in heavier scenarios, the decline can still be contained at around 0.04%.

“This means it is relatively small without anticipatory policy. This is why anticipatory policy, which importantly does not pass on energy price increases to households, is essential,” he added.

The threat of geopolitical conflict also has the potential to drive up domestic inflation. This occurs because geopolitical conflict generally triggers increases in production costs that are subsequently passed on to goods prices.

“Without anticipatory policy, inflation will rise by 0.881%,” he stated.

Rizal warned that the consumption decline will be heavier because household consumption trends have already weakened over recent years. If pressure continues through 2026, this condition could further suppress national economic growth.

He stressed that Indonesia, as an energy-importing nation, is highly vulnerable to fluctuations in global oil prices, especially when geopolitical conflict triggers price volatility in international markets.

“Indonesia is affected and will certainly suffer considerable impact if not properly anticipated,” he said.

For this reason, he believes the government must prepare policy safeguards through two main steps: stabilising energy prices and providing cash assistance, so that external shocks do not directly hit public purchasing power and national economic stability.