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.