Fuel prices finally raised

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.