Government to maintain fuel subsidy despite free market

JAKARTA (JP): Minister of Mines and Energy Kuntoro Mangkusubroto said on Tuesday the government will continue to subsidize fuel sales in the domestic market despite liberalization in the country's oil downstream industry.

He said liberalization of the country's oil downstream sector, as stipulated in the oil and gas bill currently being debated by the House of Representatives, aimed to create competition among refinery owners.

Competition is expected to force refinery owners to boost efficiency and offer competitive prices.

However, if prices remain unaffordable to the public, the government will continue to provide a subsidy mechanism.

"What's wrong with a subsidy if it is for the benefit of the public? If the House of Representatives want fuel prices in Java similar to those in Irian Jaya, we shall achieve it (through subsidies)," Kuntoro said.

Several legislators and analysts have expressed fear the liberalized market system promoted by the bill could disrupt the country's fuel distribution and pricing system. Networks have remained stable for decades under the monopoly of state oil and gas company Pertamina.

They say private fuel producers will prefer to sell their products in developed areas such as Java and Sumatra in the intense drive for a profit margin, with Pertamina left to distribute fuel in unprofitable remote areas.

If the free market system is consistently implemented, fuel in remote areas will have a much higher cost than in developed areas, due to the transportation cost.

If such a scenario plays out, people in remote areas could feel unjustly treated by the government. This in turn may place pressures on national stability, the legislators said.

Several analysts also believe fuel prices will increase up to 300 percent if the government introduces a free market system and allows fuel prices to be determined by market forces.

Kuntoro said the government would maintain its subsidy policy to prevent fuel prices from exorbitantly increasing once the downstream sector is liberalized and to ensure unified prices across the country.

He noted however that the government would only provide subsidies to help the poor and not "to cover inefficiencies in Pertamina".

"My logic is if Pertamina (refineries, fuel distribution and retail system) is efficient, the government subsidy will be on the decrease."

The bill, which is set to replace to the 1971 law on Pertamina, aims to lift the decade-long monopoly held by Pertamina on the country's oil downstream sector.

Under the bill, the government will also take over Pertamina's right to award oil and gas contracts and regulate and manage oil and gas contractors. (jsk)