Govt leaves two options for solving fuel problem

Rendi A. Witular and Urip Hudiono, The Jakarta Post/Jakarta

As the clock continues to tick and the cost of subsidizing fuel soars, exacerbated by a jump in domestic fuel consumption, the government remains undecided on which option it will take to prevent the fuel problem from disrupting the economy.

The government is now preparing three options to address the problems, and has partly begun one of them, Vice President Jusuf Kalla said during a press conference on Friday.

"The options will be; leaving the subsidy costs to increase without doing anything, reducing the subsidy expenditures -- which will mean another rise in domestic fuel prices -- and reducing consumption. We have begun the third option now for a short-term period," he explained.

The government launched a public energy conservation movement earlier this week, although many have criticized it as ineffective, calling instead for the government to reconsider its fuel subsidy policy thereby increasing the price that consumers pay for gasoline, diesel and other fuels, for the second time in five months.

Kalla said the remaining two options were hard to execute as both required sacrifices from the government and the public.

The government is facing risks, in terms of its fiscal stability and its ability to maintain its handle on the economy, with the fuel subsidy payments set to soar amid a combination of higher fuel consumption, rising global oil prices and a weakening local currency.

This year's state budget allocates Rp 76.5 trillion (US$7.88 billion) to reimburse the state oil company PT Pertamina (the sole distributor and importer of fuel) and subsidize the price at the pump for consumers, but that amount is based on an average annual oil price assumption of US$45 a barrel and a rupiah exchange rate of Rp 9,300 per U.S. dollar.

A recent surge of oil prices, now hovering around $60 a barrel, a slumping of the rupiah to the Rp 9,800 level, and a 10 ten percent increase in expected fuel consumption, could push the fuel subsidy payment this year to well over Rp 120 trillion.

According to the Ministry of Finance, the government has already spent some Rp 46 trillion (US$4.7 billion) on fuel subsidy payments to Pertamina -- more than half of its full-year allocation.

Kalla said that local administrations may actually benefit from the surging global oil prices, because they would receive more money from the central government under their revenue-split schemes, while at the same time they are spared from shouldering the subsidy.

Under the Autonomy Law, the central government has to split its oil revenue with oil-producing regions.

Elsewhere, Minister of Finance Jusuf Anwar said that apart from the energy conservation movement, the government must also boost the country's oil production, from a current 1.07 million barrels per day (mbpd) up to the budget forecast amount of 1.125 mbpd target, to prevent the subsidy payments from further burdening the budget.

Jusuf explained that under the current oil production level, recent oil prices and the rupiah exchange rate, the budget will surely receive an additional financial gap if consumption continues exceed expectations, which was forecast in the budget to be 59.6 million kiloliters this year.

"The gap between oil export revenues and fuel subsidy payments for oil imports is around Rp 20 trillion," he said.

This year's budget assumes a net fuel deficit of Rp 20.33 trillion, or 0.8 percent of the country's gross domestic product (GDP).