Tussle over fuel stocks

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.