Oil-based fuels to rise to market levels by 2008

Rendi A. Witular, The Jakarta Post, Jakarta

Following a process of gradually reducing costly fuel subsidies over the coming years, the government hopes to eventually arrive at a stage where the prices of gasoline and other oil-based fuels will be determined by those prevailing on the international market by 2008 at the latest.

To achieve this goal, the government is preparing a blueprint containing prices of fuel suitable for the public, Minister of Energy and Mineral Resources Purnomo Yusgiantoro said on Tuesday.

"We should have started applying economically feasible fuel prices in 2004. But due to various problems, this goal could not be achieved by the previous administration," he said at a press conference after meeting Vice President Jusuf Kalla. He did not elaborate on the "problems" he was referring to.

Purnomo said the blueprint would only regulate prices for premium gasoline, diesel and kerosene, all of which are still heavily subsidized by the government.

The blueprint would be discussed further during an upcoming Cabinet meeting.

Indonesia, Southeast Asia's largest economy, is expected to spend over US$10 billion this year to keep the prices on the domestic market of these three types of fuels well below international market prices.

Working Committee A of the House of Representatives' Budget Commission has drafted two scenarios for the second revision of the 2005 state budget, involving fuel subsidy spending of Rp 113.7 trillion and Rp 89.5 trillion respectively.

Committee member Catur Sapto Aji said that the first proposal envisaged a deficit of Rp 23 trillion. "If we choose the second scenario, the government will have leeway to increase fuel prices," he said.

If the Budget Commission was unable to choose between the two, a vote would be held by the full House at a plenary session next week.

However, with global oil at record highs of over $65 per barrel, the government simply can no longer afford the cost of the fuel subsidies, and, unless action is taken to reduce them, they will severely affect not only the fiscal balance, but also monetary stability.

The huge disparity between domestic gasoline, diesel and kerosene prices and overseas prices has long been blamed for rampant fuel smuggling and adulteration, which inflict losses of more than Rp 8.8 trillion (US$874 million) on the taxpayer annually.

"The smuggling, adulteration and stealing of subsidized fuel cannot be prevented entirely, unless we scrap the subsidies and go by international market prices. We will make sure that this does not cause social unrest," said Purnomo.

For the next three years, the Downstream Oil and Gas Executive Agency (BPH Migas) will supervise the distribution of subsidized fuel in a bid to prevent corruption and smuggling, with the money to pay for such supervision being allocated by the agency.

The government has announced that it will increase fuel prices in early October, prior to Idul Fitri, to keep the state budget out tract.

However, the exact date of the fuel price increase and how much prices will go up have yet to be announced.