INDEF: Pertamina's Non-Subsidised Fuel Price Hike Is a Business Reality
Economist from the Institute for Development of Economics and Finance (INDEF) has assessed that the significant 32.1 percent increase in the price of non-subsidised Pertamax (RON 92) fuel to Rp16,250 per litre is a logical consequence of global energy market dynamics and the weakening of the rupiah exchange rate, rather than a reflection of a shock to the nation’s fiscal resilience.
Head of INDEF’s Center of Food, Energy, and Sustainable Development, Abra Talattov, stated that the public needs to separate the pricing policy for commercial (non-subsidised) commodities from the condition of the state budget (APBN). He noted a strong tendency among the public and political actors to link the Pertamax price adjustment to issues of declining government financial capacity and the financing of new strategic programmes.
“There is an attempt to force a logical connection between the dynamics of non-subsidised fuel price movements and government policy in other aspects, including linking it to the Free Nutritious Meals (MBG) programme or fiscal shocks. This is not entirely correct,” Abra said during an online discussion titled “Purchasing Power Depressed, Economic Resilience at Stake” on Sunday.
Abra noted that a price increase for subsidised fuel might be relevant to link to fiscal conditions. “For non-subsidised fuel or General Fuel Types (JBU), this is purely the corporate domain and the business rationality of the enterprise,” he added.
According to INDEF data, domestic fuel production costs have faced heavy pressure from three main variables during the first half of this year. First, the escalation of geopolitical conflict in the Middle East, particularly the exchange of missile attacks between Iran and Israel involving the United States military, has pushed global crude oil prices WTI and Brent back to high levels after a brief lull. Second, the rupiah exchange rate against the US dollar experienced sharp depreciation, averaging Rp17,789 per US dollar throughout May and even briefly surpassing Rp18,000 per US dollar in early June. Third, the Indonesian Crude Price (ICP) from January to May averaged 91.8 US dollars per barrel. This ICP figure has surged 31.14 percent above the basic APBN assumption set at 70 US dollars per barrel, although it remains below the government’s psychological safety threshold of 100 US dollars per barrel.
Abra explained that prevailing regulations in Indonesia provide full flexibility to all business entities, both Pertamina and private operators such as BP and Vivo, to periodically evaluate and adjust the selling price of JBU in accordance with market price movements. Pertamina’s move to raise the price of Pertamax from Rp12,300 to Rp16,250 per litre, subsequently followed by other private operators with relatively higher margins, proves this adjustment is a normal industry response.
Interestingly, the figure of Rp16,250 per litre is considered not yet to reflect the real economic value faced by Pertamina. Official company statements and several energy sector analysts indicate that the true economic price for RON 92 fuel is currently in the range of Rp20,000 to Rp21,000 per litre. Using the lowest estimate of Rp20,000 per litre, Pertamina is still absorbing or bearing a price difference of Rp3,570 per litre, or approximately 18.8 percent, in order to maintain social stability. This raises major questions regarding Pertamina’s long-term corporate strategy.
“The question is how does Pertamina bear this difference? Is it through cross-subsidy between products, or cross-subsidy across time where current losses will be covered by future profits when world oil prices ease,” Abra said. He added that the government must not turn a blind eye to this corporate burden and must provide certainty on whether Pertamax will be reclassified as Assigned Fuel (JBKP) in the future, as happened with Pertalite in 2022.
Although it has sparked public debate regarding purchasing power, regional comparison data shows that the selling price of RON 92 fuel in Indonesia remains very competitive compared to most countries in the Southeast Asian (ASEAN) region. However, INDEF cautioned that crude price comparisons between countries cannot be taken at face value without distinguishing the economic characteristics of each nation. The fuel price formation in each ASEAN country is highly dependent on production cost structures, import dependency ratios, domestic refinery capacity, specific energy tax policies, geographical distribution costs, and the profit margins set by each business entity. Furthermore, purchasing power parity and per capita gross domestic product (GDP) of the local population are important variables that differentiate consumer sensitivity in Indonesia from neighbouring countries.
The future challenge for the downstream oil and gas industry is also projected to become increasingly complex with the massive adoption of electric vehicles (EVs) in the currently dominant conventional transport sector. Going forward, fuel providers must consider the sensitivity factor of consumers who have the option to switch to electric vehicles. Price competition between the operation of non-subsidised fuel-based vehicles and the charging costs of electric vehicles is predicted to force business entities to implement stricter internal efficiencies to suppress margins and maintain the competitiveness of their JBU products in the domestic market.