Gasoline shortage

Gasoline shortage

Although gasoline supplies began to return to normal on
Wednesday, the severe shortage that fueled panic and prompted
long queues at gasoline stations in Greater Jakarta on Tuesday
raised again serious issues about the capability of the state oil
monopoly, Pertamina, fuel smuggling overseas and the need to open
domestic fuel distribution to the private sector.

Like rice, gasoline is a basic, and even strategic, commodity,
whose supply or price could trigger social, political and
security instability. An actual or perceived shortage could
easily cause panic, a hysterical condition which usually feeds on
itself. This was observed on Tuesday when motorists formed long
lines at many gasoline stations in Jakarta. The scene caused
jitters and prompted people to buy more than they normally did,
thereby worsening the shortage, despite assurances by Pertamina
of an imminent additional large supply. It is also still clear in
our minds that the raising of fuel prices in April, 1998 was in
part responsible for fueling the national crisis that led to the
resignation of then president Soeharto in May, 1998.

Blaming repairs at the Balongan refinery in West Java and a
stoppage of gasoline imports from Kuwait for the sudden shortage,
as Pertamina and the Ministry of Mines and Energy did, is hard to
accept. Even though the shutdown of the Balongan refinery for
almost one month since June 20 was not anticipated, routine
maintenance work, the production stoppage should not have caused
such a shortage, which also hit several other towns in Java and
Bali. After all, our closest neighbors, Singapore and Malaysia,
are a major center of oil refineries.

Pertamina, which has monopolized the petroleum industry since
1968, should have been well appraised of the national need, the
capacity of the domestic refinery and the volume of imports
required.

Pertamina's new president, Baihaki Hakim, said in March that
the country's oil fuel demand this year was estimated at 40.7
million kiloliters, of which about 20 percent had to be imported
due to the inadequate capacity of the company's refineries.

The stoppage of production at the Balongan refinery certainly
caused some disruption to supply, especially as it alone accounts
for 12 percent of the national output. Likewise, the reported
blowing up of the Alamahadi refinery in Kuwait worsened the
supply problem. But a well-managed distribution system and an
adequate national stock should have avoided such a shortage.

It is unthinkable if Pertamina did not maintain a national
stockpile of such a strategic commodity at least for 30 days of
consumption, especially for emergency needs in Java, where only
two refineries operate. A stockpile is even more imperative
nowadays, given the country's dependence on imports for about 20
percent of its fuel needs.

But then the problem may have been an underestimation of the
real domestic demand on the part of Pertamina because quite a
portion of the subsidized fuel oil has been smuggled overseas.
Little has been heard of what Pertamina and other government
agencies have done to prevent smuggling after the discovery of
the contraband export of the subsidized fuel from Jakarta and
several small remote ports in May and June. If export smuggling
continues, especially now that international oil prices remain
high (above US$28 per barrel) and make contraband trade much more
lucrative, Pertamina will remain in the dark about the real
supply and demand condition.

Managing fuel oil distribution across a vast archipelagic
country like Indonesia at the same price level is indeed not an
easy job, especially because the biggest refineries are located
in Sumatra and Kalimantan, while the bulk of consumption is in
Java. Adding to the problem is the scandal-tainted Balongan
refinery which has often suffered technical trouble and is now
the focus of an investigation by the Attorney General's Office in
connection with alleged corruption in the awarding of a building
contract.

This should be an even stronger reason for the government and
House of Representatives to amend the oil and gas law in order to
allow private refineries to manage their own distribution in the
country.

As fuel oil is like the lifeblood of the economy, the demand
for this fossil energy will steadily increase along with economic
expansion. The problem, though, is that the government or
Pertamina simply does not have any money to build new refineries,
while foreign investors hesitate to enter this industry because
of the Pertamina monopoly in domestic distribution.

The government has so far licensed 10 foreign investment
projects in oil refineries, mostly in Java and Sumatra, but none
of them have materialized because of the Pertamina monopoly.
Without proper access to the domestic market, no foreign investor
will be interested in oil refineries in view of the thin margin
they can get from refining operations.