High fuel subsidy offset gains on high oil prices

Fitri Wulandari, The Jakarta Post, Jakarta

Minister of Energy and Mineral Resources Purnomo Yusgiantoro said the central government would not gain much from high oil prices due to the heavy fuel subsidy and its obligation to distribute the additional income to regional governments.

"Any windfall profit from high oil prices will go mostly to regional governments and fuel consumers in the country," Purnomo told a media conference on Thursday.

Purnomo said that, last year, windfall profit from oil prices stood at Rp 16 trillion (about US$1.7 billion) but the government had to pay additional fuel subsidy amounting Rp 13 trillion.

In the past few years, the government has been steadily raising fuel prices in order to reduce fuel subsidies and to ease pressure on the state budget, but public outcry has kept it from scrapping the subsidy completely.

In 2003, the government allocated Rp 13.2 trillion for fuel subsidies. However, high oil prices pushed the actual subsidy to Rp 26.02 trillion by the end of the year.

"A large part of the remaining Rp 3 trillion went to regional government as regional autonomy law required oil revenues to be split between the central government and oil and gas producing regions," Purnomo said.

Regions get an average of 15 percent from oil revenue, except for Aceh and Papua, which receive a higher share at 85 percent, given their special autonomy status. The remainder is held by the central government.

"So we (the central government) have not gained (from high oil prices)," he said.

The state budget assumes an average oil price of $22 per barrel this year. However, oil prices has been on the increase since December last year.

The price of benchmark U.S. light crude broke the $40 per barrel mark last week and early this week -- the highest in 13 years -- and on Thursday it held strong at just under $41 on concern that the Organization of Petroleum Exporting Countries (OPEC) might not be able to meet the surge in demand fed by global economic expansion.

Indonesia is a member of OPEC with an output of 950,000 barrels per day (bpd) to 1 million bpd. While Indonesia exports some of its oil, it also imports the commodity to feed its local refineries. The existing refineries owned by state oil and gas company Pertamina have a combined processing capacity of about 1.1 million bpd.

The government and the House of Representatives are now discussing the 2005 state budget. Purnomo said the government had yet to determine the oil price assumption for the budget as it was still awaiting an OPEC decision on whether to raise or lower its price band.

The OPEC price band is now $22 to $28 per barrel, but the cartel is going to review it in its ministerial meeting in Beirut on June 3.

"We shall maintain our conservative policy of setting the oil price assumption at a lower level than the OPEC price band in order to protect the state budget," Purnomo said.

Separately, Purnomo, who is also president and acting secretary-general of OPEC, said he was confident OPEC members would agree to increase the oil production ceiling when they met in Amsterdam next week, due to soaring crude oil prices.

Purnomo said the OPEC members would discuss Saudi Arabia's proposal to raise output by 1.5 million bpd.

"All OPEC members are concerned about this and my feeling is that they should agree (to a higher oil output) as we need to stabilize the price," he said.

The informal OPEC meeting is scheduled for next week on the sidelines of the 9th International Energy Forum in Amsterdam. It comes ahead of OPEC's extraordinary June 3 conference.