Government assumes $24 oil price

Government assumes $24 oil price

Dadan Wijaksana, Jakarta

The government defended on Monday its proposed oil price
assumption for next year at US$24 per barrel against lawmakers,
who insisted the figure was too conservative and failed to
reflect current global developments.

The legislators were referring to the soaring oil price, which
has been hovering at over $30 per barrel since early this year,
far higher than the $22 assumed in this year's state budget.

Minister of Finance Boediono told the hearing with the House
of Representatives that the 2005 figure -- which has been
approved by a team of government officials and lawmakers -- was
the best possible option to strike a balance between oil export
revenues and fuel subsidy allocations.

"It needs to be balanced ... so that we can provide enough of
a subsidy to the people and at the same time, limit the burden on
the budget," he said, adding that the figure was in line with
estimates used by the Organization of Petroleum Exporting
Countries (OPEC), which has predicted a price ranging between $22
to $28.

The higher-than-expected oil price has had mixed results for
the country, which not only exports crude oil, but also imports
it, mostly as fuel.

While it could expect profits -- extra revenues the government
gains from the margin between budgetary price assumption and
actual market prices -- from exporting oil, it could also expect
a jump in fuel subsidies.

Darmin Nasution, director general of financial institutions at
the Ministry of Finance, calculated that the profit ensuing from
a $1 price increase for oil would be Rp 3.5 trillion, less than
the Rp 4.4 trillion budgeted to cover a high fuel subsidy and
revenue-sharing with oil- and gas-producing regions.

"So, we could say that overall, we would basically suffer a
deficit from a higher-than-expected oil price," said Boediono.

With a $24 oil price assumption, the fuel subsidy has been
earmarked at Rp 21 trillion -- to be allocated primarily for
kerosene -- compared to the 14.5 trillion in the 2004 budget.

The subsidy is also based on an assumption that fuel
consumption will increase next year to 61.95 million kiloliters,
from this year's 60.8 million kl.

However, lawmaker Priyo Santoso said the government could
still revise the oil price assumption upwards without raising the
fuel subsidy, if it could eliminate or reduce fuel smuggling --
which is allegedly flourishing due to the great disparity between
local and global prices.

"If this illegal activity could be minimized, then it would
lower domestic consumption, meaning that the necessity to
subsidize it will also be reduced," Priyo said.

Fuel subsidies, especially for kerosene, have become a
sensitive issue in the country, as kerosene is widely consumed by
many low-income households and its price consequently affects the
lives of tens of millions of Indonesians directly.

On the other hand, subsidies are also seen as another burden
on the tight budget, already crippled by huge foreign and
domestic debt.