Fuel price adjustment

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.