Lawmakers set oil price at $22 for 2004

Dadan Wijaksana, The Jakarta Post, Jakarta

Legislators and the government agreed on Wednesday to set the oil price assumption for the 2004 budget at US$22 per barrel, prompting a senior government official to forecast a rise in oil subsidy to Rp 14 trillion next year.

A subcommission at the House of Representatives in charge of deliberations on the 2004 budget bill, together with Minister of Energy and Mineral Resources Purnomo Yusgiantoro, agreed on Wednesday to set the oil price $1 higher than the government's initial proposal.

They also set the oil output assumption for next year at 1.15 million barrels per day.

All decisions still have to be officially approved at a budget commission plenary meeting.

Purnomo said that the decision was based on a number of factors but mostly prospects for the global oil market in 2004.

Purnomo said that the price assumption would pose a huge challenge for the government, as many had predicted a gloomy outlook for the global oil market next year due to oversupply. As Iraqi oil begins to flood the market, Russia is also expected to increase its output.

"Such a situation would certainly affect the price. One thing for sure is that next year will be a tough one for the global oil industry," Purnomo said, adding he understood why lawmakers insisted on raising the price assumption in order to boost revenue for the cash-strapped state budget.

Previously, legislators had even asked for the price to be determined at $23 per barrel.

Aside from tax revenues, Indonesia -- one of the Organization of Petroleum Exporting Countries (OPEC) -- has been relying on income from its natural resources, especially oil, to finance the annual state budget.

The situation predicted by Purnomo would be in stark contrast to the situation this year.

This year, the government has been collecting huge windfall profits arising from a series of external woes that helped push up the international oil price, far above the budget target of $22 per barrel.

However, while the Wednesday decision to hike the oil price assumption would raise the government's oil export income, it would conversely force the budget to allocate more for oil subsidy.

According to Iin Arifin Takhyan from the ministry's directorate general for oil and gas, based on a $22 per barrel assumption, fuel subsidies would reach Rp 14 trillion, compared with Rp 12.7 trillion on a price assumption of $21 per barrel.

This year's state budget allocates Rp 25.5 trillion in subsidy to the public, including Rp 13.2 trillion in fuel subsidy.

Oil subsidy, which has been a sensitive issue here, is largely allocated to cover the gap between the domestic and international price of kerosene.

Elsewhere, the House is set also to discuss other assumptions in the 2004 draft budget.