Rebounding crude prices and a weakening rupiah are testing Indonesia’s decision to remove gasoline subsidies. State oil company PT Pertamina is picking up some of the tab for now, and is signaling it wants that to change.
“Pertamina is taking a loss for the moment,” said Ahmad Bambang, the company’s Jakarta-based marketing and trading director, explaining that the current retail price of 7,300 rupiah ($0.56) a liter is 600 rupiah less than the break-even price for Pertamina. “The government had promised us that in the end there will be no loss,” he said, without elaborating.
In a move that investors welcomed as a key policy change for Southeast Asia’s largest economy, President Joko “Jokowi” Widodo scrapped gasoline subsidies and capped assistance for diesel from Jan. 1, saying the government would regularly set a retail price that would fluctuate in line with international prices. The move was made easier for the leader, who took office in October, as it coincided with the lowest Brent crude price in almost six years.
That allowed Jokowi to cut the retail gasoline price to 7,600 rupiah a liter in January from 8,500 rupiah. Following Brent crude’s drop to $45.19 a barrel on Jan. 13, the lowest intraday level since March 2009, Indonesia’s government cut the domestic price to 6,600 rupiah on Feb. 1. Since then, authorities have raised the local price twice, most recently to 7,300 rupiah a liter on March 28.
While Brent crude prices, the benchmark for more than half the world’s oil, have now rallied 28 percent since reaching the low in January, the Indonesian retail price has so far only increased 11 percent. At the same time, the rupiah has weakened more than 4 percent against the dollar in 2015, pushing up the cost for Pertamina to buy fuel.
The government hasn’t raised pump prices as fast as it should have if it were allowing the international market to fully dictate the price, said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore.
“So far, in terms of price adjustment, the bias is quite clear,” he said. “They were very quick to bring it down when prices were coming down, but they lagged a lot in timing and magnitude when adjusting upwards. The hope was they would remove the subsidy completely.”
The government hasn’t explained in detail how it intends to set the gasoline price at the pump going forward, especially if Brent crude prices were to rise toward the $100-a-barrel level, where they were in mid-2014.
Energy and Mineral Resources Minister Sudirman Said told parliament on March 31 the country would have to get used to price increases. Even so, the government would not “fully let the market dictate” prices, he said, without elaborating.
Pertamina’s Bambang said there might be a floor and a ceiling price, with the upper band no more than 8,500 rupiah a liter.
“We are still discussing with parliament,” he said in an interview April 9. “The policy to change prices each month is not good for the economy. The parliament has suggested to the government it could be every three months or six months. ”
While the government has pledged to spend much of the billions in savings from overhauling the fuel subsidy system this year on infrastructure, education and health, increases in fuel prices aren’t popular with many Indonesians. More expensive fuel leads to increases in public transport and food costs in a nation where the World Bank estimates 43 percent of people live on less than $2 a day.
On April 9, several hundred students and workers rallied outside the presidential palace in downtown Jakarta against the decision to remove gasoline subsidies.
“We reject the market mechanism for fuel,” said one speaker atop a small truck. “Fuel prices rises mean our salaries are getting smaller. Jokowi, are you listening? This is just the beginning of our protests.”