SBY ready for unpopular step on oil

Tiarma Siboro and Dadan Wijaksana, The Jakarta Post/Jakarta

Repeating pledges made during the presidential election campaign, president-elect Susilo Bambang Yudhoyono said on Friday that the new government would not hesitate to take politically unpopular economic measures as long as these were in the best interests of the country.

Susilo, who will be sworn in as the country's sixth president on Oct. 20, told a group of businessmen that the government might "take steps that are unpopular if they are necessary to secure our future."

While saying that detailed information on the strategies, targets and policies of his government would be announced on Oct. 21, the remark could be a veiled reference to cutting fuel subsidies and raising domestic fuel prices amid soaring crude oil prices.

During a televised presidential dialog on Sept. 5, Susilo also made similar remarks, saying the new government did not rule out the possibility of cutting fuel subsidies if global oil prices remained high as this would be necessary to avoid future fiscal disaster.

"We aim to introduce more targeted subsidies," said Susilo at the time, while quickly adding that any such move would not inflict suffering on the poor.

The debate on fuel subsidies has reemerged as global oil prices surge to record levels. In London, the price of Brent North Sea crude oil for delivery in November reached a record of US$49.30 in early deals on Friday, breaking the previous peak of $49.20 set on Thursday. U.S. light crude for November delivery jumped to a new record of $53 per barrel on Thursday in New York, and slightly eased on Friday but sill hovered close to a 21-year high.

Rocketing oil prices mean that the government has to allocate more out of the state budget on fuel subsidies. Even based on an oil price assumption of $36 -- as agreed on by the government and the House of Representatives -- fuel subsidies have been budgeted at Rp 59.2 trillion, or 307 percent higher than the Rp 14.5 trillion projected earlier this year.

With most of the subsidies being largely enjoyed by car owners, the huge sums involved have intensified suggestions that the government cut the subsidies and allocate the money saved on attempting to improve the welfare of low-income groups.

By reviewing the current fuel subsidy policy, economists said, not only could the government help the poor more effectively, but could also allocate more funding for other crucial areas.

Many see this issue as a major test of Susilo's capabilities as a leader, not only because the issue is a sensitive one, but also because it could easily be used as a political weapon for attacking Susilo's credibility.

In a related development, Organization of Petroleum Exporting Countries (OPEC) -- which supplies about a third of the world's oil -- said it had no plans to increase oil production despite the current surge in oil prices, cartel president Purnomo Yusgiantoro said.

The high prices were the result of "fears of lack of supply during the winter, but the futures price for next year is falling because the market expects smaller demand and lower prices next year.

"We still believe that the price will be below $50 next year," Purnomo said.

Some analysts disagree.

"A few months ago, $40 was the psychological resistance level, but now $50 is not unusual anymore."

"Today, it's $53 and I think that when you have a confluence of various events threatening supplies, prices could even approach $60. I don't think people now think 60 is an unfeasible number," Victor Shum, a Singapore-based senior partner with U.S. energy consultancy Purvin and Gertz, told AFP.