Fuel prices finally raised

Administrative capacity to manage fuel distribution based on a two-tier pricing system and smoothness in the channeling of the compensation funds allocated to help mitigate the impact of higher fuel prices on the poor will determine the success and orderliness of the implementation of the new fuel pricing policy.

After two weeks of delay and uncertainty that prompted speculative hoarding, the government finally decided to increase fuel prices beginning on Thursday, resulting in an average price rise of 22 percent over the previous levels.

However, in contrast to the previous policy that set the prices in fixed, absolute terms, the new pricing mechanism floats fuel prices, except for kerosene, on the international market using Mid Oil Platts Singapore (MOPS) quotations as the reference prices.

The new policy should be welcomed as it seeks to promote as much as possible the principles of fairness in burden sharing and efficiency in fuel use. It simultaneously improves the climate for the development of alternative energy resources such as coal, natural gas and geothermal energy, which are abundantly available in the country.

Even though kerosene for households and small businesses underwent the biggest price rise (50 percent) to Rp 600, it is still more than 60 percent below the international price and accounts for the bulk of the Rp 30.4 trillion in fuel subsidies allocated for the current fiscal year.

There are several benefits to be derived from setting the prices of kerosene for users other than households and small businesses, automotive diesel oil, industrial diesel oil and fuel oil at 75 percent of international prices for all users, except major mining companies that have to pay the full prices, and of gasoline at 100 percent of MOPS.

These price levels not only seem fair and affordable for the users, but also will encourage efficient use, notably of gasoline, which is guzzled mostly by passenger cars owned by the wealthier members of society.

Pegging the prices closer to international prices will reduce the incentive for smuggling and will spare the government the political wrangling needed to adjust domestic prices every time international crude oil prices change. Under the new mechanism, fuel prices will automatically be adjusted monthly in accordance with MOPS.

However, in order to anticipate the wild fluctuations that often take place on the international market, the government has set floor and ceiling prices for each type of fuel so as to provide a reasonable degree of predictability and to protect users from excessive burdens caused by speculative prices.

The government should realize that deciding on a measure is not the end but rather only a small, first step of the policy- making process. The new fuel pricing policy has yet to be sold to the public from the point of view of safeguarding its smooth implementation, even though the measure is entirely rational and has been approved by the House of Representatives as part of the ongoing program to eventually eliminate wasteful fuel subsidies by 2004.

No amount of military force would be able to safeguard the measure if it were opposed by the majority of the people as grossly unfair and if the circumstances did not convince the people that everyone was shouldering the burden equally.

The central government and local administrations should therefore reach out to the people, explaining the crucial importance of the policy for preventing the national economy from collapsing, how fuel subsidies have so far been enjoyed mostly by well-to-do families, and how the wide differences between domestic and international prices have been exploited by profiteers through the smuggling of cheap fuel overseas.

However, the policy cannot be sold in a vacuum, meaning that the environment should support the credibility of the policy and the government. This means that the government itself should convince the people that it too is shouldering its fair share of burden by strictly implementing austerity measures, minimizing waste through inefficiency and corruption, and dealing firmly and quickly with profiteers who smuggle fuel overseas.

It is comforting to note that Pertamina, the state oil and gas monopoly, has built up experience in administering two-tier prices for fuel since mid-2001 when major mining companies and international shipping companies were required to pay for their fuel at full MOPS prices, while most other major industrial users were required to pay at 50 percent of MOPS prices.

Nevertheless, given the high level of venality among officials, the supervision mechanism will have to be improved steadily so as to ensure smooth fuel distribution and that the Rp 2.8 trillion in compensation funds will fully reach the targeted poor families. It is no less important to ensure that costlier fuel does not give rise to an excessive inflationary spiral as regards the prices of other goods and services.