Part 2 of 2: Fundamentals the cause of oil price turbulence

Part 2 of 2: Fundamentals the cause of oil price turbulence

Kurtubi, Jakarta

A similar phenomenon is also found in India, which has a
population of nearly a billion people. A rise in oil consumption
is also found in the United States, the world's biggest oil-
consuming country, accounting for 26 percent of the world's total
oil consumption, which, in the fourth quarter of 2004 is expected
to be between 83.5 and 84 million barrels per day.

In the annual conference of International Association of
Energy Economists (IAEE) held in July 2004 in Washington D.C.,
the executive director of the International Energy Agency (IEA)
also acknowledged this phenomenon. Several parties also proposed
during the conference that the funds that OECD collected in the
form of oil/gasoline tax should be partly returned to oil-
producing countries and invested there in the upstream sector.
The purpose of this arrangement is to ensure the continuity in
the fulfillment of the world's oil demand will be better
guaranteed, something that is also the concern of OECD member
states.

It is worth noting that at the price level of $35/barrel, the
oil taxes collected by OECD countries would total about $1
trillion, far exceeding the gross oil earnings recorded by all
OPEC countries combined, which, at the same price level, amounts
to only about $300 billion. However, this proposal, certainly,
failed to get enough support from the conference participants,
who were mostly representatives of OECD countries.

Indeed, however, this proposal is not a castle in the sand.
Now that the price of oil has reached a relatively high level,
many parties in Europe have already suggested the reduction of
the gasoline tax rates, which in several countries, like Germany,
Great Britain, France and Holland, are three times as much as the
market price of oil.

If OECD countries agree to lower their oil tax rates, this
reduction will be of great help to consumers in OECD countries
even if the price of oil remains about $40/barrel or even above
$50, because then prices at gas stations, now the equivalent of
around Rp 15,000/liter in most of Western Europe, can be lowered.
It must be noted that at this price level, only Rp 5,000/liter
will go to the oil company while the remaining Rp 10,000/liter
will go to various governments as tax revenue.

On the other hand, an increase in the earnings of oil-
producing countries as a result of the "high" price, should be
returned for investment in the upstream sector to ensure the
sustainability of increases in reserves and production levels.

It is, however, understandably difficult for OECD countries to
"surrender" to the pressure of their domestic fuel consumers that
the fuel tax must be reduced because this reduction will
immediately lead to a drop in the state budget of each OECD
country. Nevertheless, this issue can be used as material for a
constructive dialog between producing countries and international
oil consumers so that they will not view the problems related to
the international oil prices and oil fuel taxes from their
respective stances.

For Indonesia, where in the past five years, oil production
has continued to drop from about 1.5 million barrels per day in
1999 to 1 million barrels per day in 2004, there is no other
option but to make every effort to immediately increase its oil
exploration and production levels so that it can again be solely
an oil exporter.

Lower production and a lack of fresh investment in the oil and
gas sector are not only attributable to "natural" factors (aging
oil wells and depleted reserves), but also to inappropriate
management and legislation -- most notably, Law No. 22/2001 on
oil and gas, which imposes a variety of discouraging taxes on
investors during the exploration stage.

For over 3 decades, in fact, investors were only taxed when
they actually discovered and produced oil or gas. If our
production can be raised to over 1.3 million barrels per day, our
membership in OPEC will not be questioned by oil executives in
Western Europe, a concern that many of them shared with me during
various meetings in Germany and France. It is to be noted that
the demand for crude oil to fulfill domestic demand in 2004
stands at around 1.3 million barrels per day, while production
levels are, as mentioned above, 1 million barrels per day.

If Indonesia fails to raise its production level, not only its
membership in OPEC will be in doubt but, more dangerously, it
will increase its dependence on imported oil. This poses a great
danger to the country's economic resilience and security.

We hope that the new government that is elected next month,
will be able to improve this sad situation of our national oil
and gas industry. A drop in production when the oil price soars
and the oil subsidy continues to increase has led to the
government's inability to finance the establishment of
educational, health and transportation infrastructure or open up
employment opportunities.

The writer is the Director of the Center for Petroleum and
Energy Economics Studies (CPEES), and is a lecturer in the
postgraduate program at the University of Indonesia's School of
Economics.