Fuel price adjustment

It is encouraging to note the relative calm in which the general public reacted to the increase in fuel prices on Thursday, the third since January. Unlike January's announcement of price increases, which was met by major street demonstrations, the latest rise, though much higher than the one in early April, seemed to be accepted as something unavoidable.

This trend should be welcomed and appreciated as representing a significant advance in the education of consumers in the economics of commercial energy. Consumers have now begun to realize that sooner or later they will have to pay for fuel based upon its economic cost or face supply disruptions.

There are, we think, several factors responsible for the calm reaction to the price increases. First of all, the rate of the latest price increases for the most widely-used fuels -- 9.3 percent for gasoline and 12 percent for kerosene -- is not as high as the average 22 percent hike in mid-January.

Most important, though, is the relatively effective information campaign launched for the introduction of the new fuel-pricing policy in January when prices were floated, except for the price of kerosene, based upon international market prices using Mid Oil Platts Singapore (MOPS) quotations as the reference. This meant that domestic fuel prices became adjustable every month based on the MOPS quotations and the rupiah's exchange rate.

The new pricing policy seems to have gained political acceptance because the reasons for the new mechanism are seen as being both rational and sensible, and the principle of fairness in burden-sharing and efficiency in fuel use has been emphasized.

While the prices of other fuels have been floated, the price of kerosene, the commercial energy source most widely used by the common people, was fixed at Rp 600 (6 dollar cents) for households and small business users.

Resistance to the new policy was also minimized as consumers were not fully exposed immediately to international prices. Despite their floatation, the price of fuel for industrial users, except mining firms, has been set at only 75 percent of MOPS quotations. However, gasoline, which is used mostly by passenger cars owned by the wealthier members of society, has been set at 100 percent of the MOPS price.

The January policy also protects consumers from wild fluctuations in international market prices by setting floor and ceiling prices for each fuel so as to provide a reasonable degree of predictability.

The latest prices announced on Thursday, for example, are still below the ceiling prices announced on Jan. 16, except for gasoline, which has reached its ceiling price of Rp 1,750, even though international oil prices have risen to as high as $26 per barrel, far above the $22 assumed for the ceiling price, and the rupiah rate still languishes at around Rp 9,400-Rp 9600 per dollar, compared to the average of Rp 9,000 assumed when drafting the fuel pricing policy.

The government, however, should not take the public's acceptance of the automatic fuel price adjustment mechanism for granted even though the public now seem relatively comfortable with the policy. The marketing of the new policy should continue because it greatly helps the government in that it is now spared a round of political wrangling with the House of Representatives every time a price adjustment is needed.

The education of consumers is an ongoing process. The political acceptance and credibility of the policy could be eroded if the government cannot improve its administrative capacity to manage fuel distribution under the current two-tier pricing system, and to ensure the smooth distribution of the Rp 2.8 trillion in compensation funds allocated to help mitigate the impact of higher prices on the poorest segment of society.

The policy's political acceptance would further be strengthened if the government continued to show to the public that it was also shouldering its full share of the burden by minimizing waste and inefficiency, cracking down on corruption and dealing firmly with smugglers.

Attention will also be focused on the credibility of Pertamina, which is now responsible for determining the monthly price adjustments. With its monopoly over oil supplies, Pertamina plays a vital role in facilitating smooth fuel distribution and preventing fuel smuggling. It should work harder to improve its corporate governance and to bolster its image given that in the past it was notorious for corruption and gross inefficiency, as well as being a cash cow for senior officials and politicians.