`Good news': Crude oil prices soon to tumble

Endy M. Bayuni, Jakarta

The pressure is off. World oil prices are tumbling and there is no need for us to worry about the next round of increases in fuel prices at home. The era of sky-high oil prices, the source of our worries for much of this past year, is not here to stay.

That is if you believe this government.

Indications that world oil prices will ease up considerably next year is the implicit -- yet widely played down -- message in the State of the Nation Address delivered on Tuesday by President Susilo Bambang Yudhoyono.

In unveiling the government's budget proposal for the year beginning Jan. 1, the President disclosed that projected revenues and spending had been calculated on the basis of world oil prices averaging US$40 a barrel throughout 2006.

Estimates of world oil prices and of Indonesia's crude oil production for next year are among the crucial assumptions used to arrive at the budget draft for two reasons: One is that the government still relies to a considerable extent on tax revenues from the oil and gas sector. And two is that the government has had to fork out a considerable sum each year to subsidize fuel consumption.

This year alone, as the finance ministry estimates -- albeit conservatively -- that since the average of oil prices will be $50.60 a barrel, the government has to allocate Rp 101 trillion for fuel subsidies.

If world oil prices stay above $60 a barrel for the rest of the year, then the fuel subsidy, which has largely assisted the owners of private vehicles, will cost the government more.

If we were still in the 1980s or even the 1990s, falling oil prices on the world market would have been regarded as bad news because that would have represented to the government the loss of huge sums of potential income.

Today, Indonesia has become a net oil importer -- meaning we import more oil than we export -- so much so that high oil prices would be more of a bane than a boon.

On top of that, the policy to subsidize domestic fuel prices -- a legacy of Soeharto's oil heyday, which is still retained in spite of changing circumstances -- is costing the government a huge sum.

Money that would have been better spent on other basic services, including education, health and defense, is being squandered to keep our cars on the road.

It is a policy that is effectively transferring resources from the needy to the wealthy.

Going by the President's speech on Tuesday, however, our headaches are over.

Our problem has been resolved automatically with oil prices on the world markets predicted to crash to the more manageable level of $40 a barrel throughout next year, according to the speech.

There is a logical explanation for the assumption that world oil prices are going to decline suddenly and sharply, which we can find in the explanatory note to the speech: "This fall is related to the prediction of declining global demand for crude oil, and rising supply from OPEC members. Besides, industrial countries will also expand their oil refining capacities that will help to depress the rise in oil prices."

This is a brave prediction when most oil analysts say the markets remain volatile and that prices could still go either way in 2006. Some are even predicting $70 to $80 a barrel, but few people are predicting $40 barrel or less.

It may be hard to believe, but this prediction has found its way into government documents and has become the basis for calculating the budget for 2006. With government spending accounting for 18 percent of the gross domestic product, how much it spends and on what will have a strong multiplier effect on the rest of the economy.

How the government sets its budgetary targets, therefore, influences how the private sector and individuals budget for the coming year.

Getting its prediction right, or as close to reality as possible. is thus imperative, not only for the government but also for the rest of the economy.

At any rate $40 a barrel seems an overly optimistic -- irresponsible even -- assumption at this stage.

Bear in mind that the government has been consistently wrong in assuming world oil price trends in the calculation of this year's budget. Initially it set $24 a barrel, revising the price assumption upward to $35, then $45 and now $50.60 a barrel. Even this could prove to be rather too hopeful.

Such mistakes in predicting the oil price have forced the government to keep returning its budgetary plans to the House of Representatives for deliberation and approval, thus unnecessarily holding back many essential spending on social services for months.

Did we not learn our lessons this year? Are we about to make the same mistake again by deliberately underpredicting the price of oil in 2006?

Only time will tell whether, the government can get a grip on the realities of the international market. If it misses too far off the mark, there will be wider repercussions, not only for the government's budgetary plans, but for the entire economy.