Tussle over fuel stocks

State oil and gas company Pertamina learned an important lesson from its earlier success in quickly collecting its accounts receivable from the government. Last week, the company used the same ploy it deployed in April, warning the government that national fuel stocks were dangerously below the minimum safety level of 22 days.

The warning, relayed through the media and reinforced by scenes in several provinces of long lines of motorists at gas stations and some stations completely out of fuel stocks, worked wonders for Pertamina -- the government rushed to make another payment to the oil monopoly.

The government never seems to learn from Pertamina's game of brinkmanship. The government should have realized as early as April that international oil prices for the year were not likely to fall below the US$45 per barrel level, and accordingly examined the cash flow of Pertamina and worked out mechanisms for the improved disbursement of fuel subsidies to the company.

Maintaining a minimum national fuel stock of 22 days is vital for a vast archipelago like Indonesia, where about 70 percent of fuel has to be transported by sea. Certainly, building a fuel stock and storing the fuel costs a lot of money, given the domestic consumption of about 1.1 million barrels of oil per day, of which more than 350,000 barrels have to be imported. There should be a political consensus on how to finance the fuel stock and pay its storage costs.

This was one of the problems that was resolved by the government during a limited Cabinet session chaired by President Susilo Bambang Yudhoyono on Thursday night. The government decided to inject $320 million into Pertamina to replenish its fuel stocks from 17.2 days as of last week to the minimum level of 22 days.

But there should be a more expedient and transparent system for the disbursement of fuel subsidies to Pertamina. This means that however the new system is designed, it must ensure the amount of reimbursement paid to Pertamina is based on actual fuel sales to eligible consumers, while at the same time not jeopardizing the company's cash flow. We do not want taxpayer money wasted subsidizing fuel for industrial users or fuel that ends up being smuggled overseas.

Without better reimbursement mechanisms, similar fuel stock problems could reoccur and Pertamina might once again resort to threats in its dealings with the government.

However, improved reimbursement mechanisms, besides being only an ad hoc measure, will not resolve the root of the problem -- price subsidies.

The fact is that global oil prices will likely remain above $50 per barrel for the rest of the year, while the Rp 76.5 trillion ($8.05 billion) allocated by the government for the fuel subsidy this year is based on an average oil price assumption of $45 a barrel. This means the government will have to use a larger portion of its scarce resources for the fuel subsidy, unless it has the political courage to bite the bullet once again and raise fuel prices on top of the average 29 percent price increase in March.

The government has said it will not spend a single rupiah more for the fuel subsidy than what has already been allocated, and President Susilo has ordered the energy ministry to design a comprehensive fuel conservation program.

While a fuel-saving program is essential, its implementation will be extremely difficult if domestic fuel prices remain more than twice as low as prices in other countries.

Domestic fuel consumption will certainly expand by at least 10 percent a year to support annual economic growth of 5 percent. Just look at a report released by the automotive industry association last week, which cited a 35 percent rise in car sales in the first five months of the year.

The most effective way to force the efficient use of fuel is to sell fuel at least at its cost price. Moreover, energy diversification -- the only permanent solution to the fuel crisis -- is not feasible as long as domestic fuel prices remain heavily subsidized. Cheap oil fuels make investment in other energy sources such as natural gas and coal, which are abundant in the country, commercially unfeasible.

The 2002 pricing mechanism, whereby domestic fuel prices, except kerosene, were floated on market quotations in Singapore as the reference prices, should be revisited.

Adjusting domestic fuel prices every month based on the Singapore quotations and the rupiah exchange rate would provide policy predictability for the general public, notably businesspeople, and spare the government the annual hassle with the House of Representatives in determining the budget allocation for the fuel subsidy.

More importantly, price parity with neighboring countries would curb smuggling.